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Ninth Circuit Holds FAA Preempts Montana's Public Policy Against Enforcing Contracts of Adhesion
On July 15, the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) preempts Montana’s public policy invalidating adhesive agreements running contrary to the reasonable expectations of a party. Mortensen v. Bresnan Comms. LLC, No. 11-35823, 2013 WL 3491415 (9th Cir. Jul. 15, 2013). In this case, the plaintiffs filed a putative class action against an internet service provider (ISP) that participated in a trial program in which the ISP’s customer’s personal information allegedly was passed on to an advertising company in violation of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, and state privacy and property laws. The ISP moved to compel arbitration, arguing that the welcome kit’s its service technicians delivered included mandatory arbitration provisions that required application of New York law to any disputes. The court vacated a trial court’s order declining to enforce arbitration, holding that AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), requires that the FAA preempt Montana’s reasonable expectations/fundamental rights rule, despite the state’s interest in protecting its consumers from unfair agreements, because that rule has a disproportionate impact on arbitration agreements. As a result, the court also held that the district court erred in not applying New York law because a state’s preempted public policy was an impermissible basis on which to reject the parties’ choice-of-law selection. The court vacated the district court’s order declining to enforce the arbitration clause and choice-of-law clause and remanded with instructions to apply New York law to the arbitration agreement.
Federal District Court Compels Arbitration of Debt Collection Robosigning Suit
On July 12, the U.S. District Court for the Southern District of New York held that members of a putative class must arbitrate their claims against creditors for allegedly unlawful debt collection practices individually. Shetiwy v. Midland Credit Management, No. 12-7068, 2013 WL 3530524 (S.D.N.Y. Jul. 12, 2013). A group of creditors facing allegations that they violated the RICO Act and the FDCPA by conspiring with third party debt collectors to collect debts through fraudulently obtained default judgments, including judgments obtained through practices associated with robosigning, moved to compel arbitration based on the terms of their cardmember agreements, which require mandatory arbitration on an individual basis of any claims arising from a cardmember’s account. The court held that even if the plaintiffs could show that costs associated with individual arbitration would preclude vindicating their statutory rights under RICO and the FDCPA, the U.S. Supreme Court’s recent holding in American Express Co. v. Italian Colors Restaurant, “made clear that a generalized congressional intent to vindicate statutory rights cannot override the FAA’s mandate that courts enforce arbitration clauses” like the one at issue here. The court explained that “[n]othing in the text of RICO or the FDCPA indicate [sic] a more explicit ‘contrary congressional command’ than that contained in the federal antitrust laws at issue in Italian Colors” and that “[i]n fact, the FDCPA explicitly limits recovery obtained by unnamed class members in a class action, without regard to how that will affect total recover for each individual.” The court enforced the arbitration agreements and stayed the case as to the creditors pending arbitration.
U.S. Supreme Court Holds FAA Permits Class Arbitration Waivers
On June 20, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a class arbitration waiver “on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.” American Express Co. v. Italian Colors Restaurant, 570 U.S. ___ (2013). The Court reversed a Second Circuit decision that held that because the costs for the individual plaintiff to arbitrate its claims would be prohibitive, the class action waiver was unenforceable and arbitration could not proceed. The Court explained that the Second Circuit’s “effective vindication” doctrine is a judge-made exception to the FAA that “finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’. . . [b]ut the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court added that there is no congressional command to reject the waiver of class arbitration, and that congressional approval of Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights.
Massachusetts Supreme Court Holds That Courts May Invalidate Certain Arbitration Agreements With Class Action Waivers
On June 12, the Massachusetts Supreme Judicial Court (SJC) held that courts may invalidate an arbitration agreement that includes a class action waiver where the plaintiff demonstrates that his or her claim effectively cannot be pursued in individual arbitration. Feeney v. Dell, Inc., No. SJC-11133, 2013 WL 2479603 (Mass. Jun. 12, 2013). In this case, the court determined that the plaintiffs could not effectively pursue their statutory claim under the individual claim arbitration process given the complexity of their claims and the small amounts of individual damages. The SJC therefore affirmed the trial court’s order invalidating the agreement. According to the SJC, the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), left open the possibility that an arbitration agreement may be invalidated if the agreement effectively prevents the claimant from vindicating his or her statutory cause of action. Still, the SJC’s decision arguably conflicts with several decisions in the federal courts of appeal that question that the continuing vitality of the “vindication of rights” doctrine following Concepcion. The decision also addresses an issue currently before the Supreme Court in American Express Co. v. Italian Colors Restaurant, No. 12-133 (S. Ct. argument heard Feb. 27, 2013).
U.S. Supreme Court Refuses to Vacate Arbitrator's Decision Allowing Class Arbitration
On June 10, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit a court to vacate an arbitrator’s decision to allow class arbitration where the parties authorized the arbitrator to decide the issue. Oxford Health Plans LLC v. Sutter, No. 12-135, 569 U.S. ___ (2013). In this case, a health insurance company sought to overturn an arbitrator’s holding that the contract between the company and a doctor claiming the insurer failed to fully pay him and similarly situated doctors authorized class arbitration of the claims. The parties agreed that the arbitrator should decide the issue, but in seeking to overturn the decision, the insurer argued that the arbitrator exceeded his authority under the FAA. Citing the narrow standard of judicial review under the relevant FAA provision and the “heavy burden” a party bears under that provision, the Court held that the parties’ agreement to allow the arbitrator to decide the issue of class arbitration of the claims is sufficient to show that he did not exceed his powers. The insurer argued that the Court’s holding in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) that an arbitration panel exceeded its powers when it ordered a party to submit to class arbitration should apply here. The Court rejected that argument, explaining that in Stolt-Nielsen the Court overturned the arbitral decision because it lacked any contractual basis for requiring class procedures, whereas in this case, the arbitrator construed the parties’ contract at their request.
CFPB Plans Credit Card Arbitration Survey
On June 6, the CFPB released a notice and request for comment on its plan to conduct a new survey related to its ongoing study of arbitration agreements. A supporting document submitted with the notice includes the initial survey questions proposed by the CFPB. The CFPB plans to contact 1,000 credit card holders to evaluate their awareness of card agreement dispute resolution provisions, and their “assessments of such provisions.” The CFPB stated that the survey will seek information regarding card holders’ perceptions and valuations of arbitration and litigation, but will not gather data regarding respondents’ post-fact satisfaction with arbitration or litigation proceedings. Comments on the proposed survey are due by August 6, 2013.
Third Circuit Clarifies Standards for Deciding Motions to Compel Arbitration
On May 28, the U.S. Court of Appeals for the Third Circuit resolved an inconsistency in the circuit regarding the standard a court should apply when deciding a motion to compel arbitration. Guidotti v. Legal Helpers Debt Resolution, L.L.C., No. 12-1170, 2013 WL 2302324 (3rd Cir. May 28, 2013). In this case, several debt settlement firms moved to compel arbitration after being sued by a debtor who claimed the firms defrauded her and similarly situated persons. The court granted arbitration for most of the defendants but denied with regard to two, holding that the debtor’s pleading demonstrated that the parties had no meeting of the minds on an agreement to arbitrate. On appeal, the court held that the record before the district court was insufficient to prove that there was no genuine dispute of material fact regarding the agreement to arbitrate. In doing so, the court explained that it has inconsistently applied a motion to dismiss standard and a motion for summary judgment standard to motions to compel arbitration, which the court believes is in part explained by the Federal Arbitration Act’s (FAA) alternating emphasis on speed and enforcement of private agreements. To reconcile the conflict, the court held that the FAA favors resolving a motion to compel arbitration under the speedier motion to dismiss standard when the affirmative defense of the arbitrability of claims is apparent on the face of the complaint or its supporting documents. However, the court held, when the motion does not have as its predicate a complaint that clearly indicates the affirmative defense of arbitrability, a “more deliberate pace is required” and a summary judgment standard is more appropriate. The court vacated and remanded the district court’s order denying arbitration.
Ninth Circuit Enforces Student Loan Arbitration Agreement
On April 11, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, held that a national bank could compel arbitration of a dispute involving student loans. Kilgore v. KeyBank, Nat’l Ass’n, No. 09-16703, 2013 WL 1458876 (9th Cir. Apr. 11, 2013). Former students of a failed flight-training school filed a class action in state court seeking broad injunctive relief against the bank that originated their student loans and the loan servicer. However, each of the students had executed a promissory note containing a provision requiring arbitration and prohibiting arbitration of claims on a class action basis. The bank removed the action to federal district court and moved to compel arbitration. The district court denied the motion and subsequently granted the bank’s motion to dismiss the claims. On appeal, the Ninth Circuit held that the arbitration provision was enforceable under the Federal Arbitration Act and that it was not substantively or procedurally unconscionable under state law. The court further held that the plaintiffs’ claims were not exempt from the FAA under the “public injunction” exception because the bank’s alleged statutory violations already ceased, the class affected by the alleged practices is small, and there is no real prospective benefit to the public at large from the relief sought. The court vacated the district court’s dismissal of the students’ claims, reversed the denial of the bank’s motion to compel arbitration, and remanded with instructions to the district court to compel arbitration.
California Appeals Court Enforces Retail Installment Sales Contract Arbitration Agreement.
On March 27, the California Court of Appeal, First Appellate District, enforced an arbitration agreement in a retail installment sales contract. Vasquez v. Greene Motors, Inc., No. A134829, 2013 WL 1232343 (Cal. Ct. App. Mar. 27, 2013). While the court held that the agreement was “procedurally unconscionable” because the agreement “was imposed on [the Defendant] without the opportunity for negotiation, and was therefore adhesive,” it reversed the lower court’s denial of a motion to compel arbitration. In so holding, the court reasoned that the level of procedural unconscionability was “minimal” and that there was no significant substantive unconscionability. The court held “the only suggestion of substantive unconscionability . . . was the failure of the clause to permit an ‘appeal’ arbitration in the event a buyer sought and was denied injunctive relief,” but that “this asymmetry is mitigated by the provision permitting a second arbitration if a buyer is denied a monetary recovery.” Finding “minimal unconscionability,” the court reversed the trial court order denying the petition to compel arbitration and directed the trial court to order arbitration.
Washington Federal Court Holds Standard Business Practices Insufficient to Support Arbitration Claim
On February 15, the U.S. District Court for the Western District of Washington held that a cable company could not force arbitration of a dispute by relying only on its standard business practices to support its claim that the plaintiff agreed to arbitrate. Permison v. Comcast Holdings Corp., No. C12-5714, 2013 WL 594304 (W.D. Wash. Feb. 15, 2013). A cable customer with accounts in Colorado and Washington sued the company alleging TCPA violations. The cable company sought to compel arbitration, claiming that “Welcome Kit” materials executed by the customer included an agreement to arbitrate. In support of its motion to compel arbitration with regard to the Colorado accounts, the cable company submitted an affidavit describing its standard business practice, which requires technicians to provide customers with the Welcome Kit, and obtain customer signatures on certain terms and conditions included in the Kit. The court held that reliance on standard business practices is insufficient. Instead, the court stated, the cable company must produce business records or testimony showing that the customer actually received the arbitration agreement and assented to its terms. The court noted that the cable company presented actual evidence with regard to the Washington account, but held that it is not clear whether that contract, and its arbitration clause, impact the customer’s TCPA claims because of imprecise pleading. The court denied the company’s motion to compel arbitration and granted the customer leave to clarify his claims. The court’s holding follows a recent 10th Circuit decision that affirmed a district court’s dismissal of claims based on unrefuted declarations submitted by a TV and internet service provider’s employees concerning its standard practices for entering into agreements provided to customers in writing by the installation technician at the time the services were installed.