The Next Frontier Of Arbitration Litigation: Lessons From State Courts

by Stinson Leonard Street - Arbitration Nation
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SpaceFrontierAfter reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).

PREEMPTION

A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.

AUTHORITY

Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).

NON-SIGNATORIES

Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.

DID THE PARTIES INTEND ARBITRATION TO BE PART OF THE AGREEMENT?

The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.

THE ARBITRATION CLAUSE IS UNENFORCEABLE

An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.

APPEALS

One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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