Arbitration Process Issues

In Rent-A-Center v. Jackson, No. 09-497 (Sup. Ct. June 21, 2010), the U.S. Supreme Court considered whether a provision that delegated to an arbitrator the authority to decide whether any portion of an arbitration agreement was void or voidable is enforceable under section 2 of the Federal Arbitration Act (“FAA”), in a situation in which it was contended that the agreement was unconscionable under Nevada law The Court recognized that it had previously held that parties can agree to arbitrate “gateway” questions of “arbitrability,” such as whether an agreement covers a particular controversy. The Court further recognized that there were two types of challenges to the validity of an agreement under section 2 of the FAA: (1) challenges to an agreement to arbitrate itself; and (2) challenges to the contract containing the arbitration agreement as a whole, “either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” Only the first type of challenge is relevant to a court’s determination whether the arbitration agreement is enforceable. Since an arbitration provision is severable from the remainder of the contract, a challenge must be specifically directed to the arbitration provision in order for the court to intervene. Since the challenge here was to the contract as a whole, rather than specifically directed to the arbitration provision at issue, the arbitration provision was enforceable, and the arbitrator had the authority to determine the issue of unconscionability.

This post written by Michael Wolgin.

On August 3, 2009, we reported on a district court vacating its prior order that arbitration must commence anew and reappointing an arbitrator to the panel after the arbitrator’s health improved. Insurance Company of North America and INA Reinsurance (collectively, “INA”) appealed and also successfully moved for a stay pending the appeal in the Second Circuit, as we reported on April 15, 2010.

Now, the Second Circuit has issued its decision affirming the district court’s grant of Public Service Mutual Insurance Company’s motion for relief from the judgment based on newly discovered evidence that an arbitrator who had resigned was, in fact, able to rejoin the arbitration panel prior to the district court’s decision on whether to convene a new panel or order a replacement arbitrator. According to the Second Circuit, the general rule that a new panel should be convened if a vacancy arises on an arbitral panel due to the death of an arbitrator prior to the rendering of an award does not apply to a vacancy created by a resignation. The Second Circuit further found that the district court’s decision either to reappoint the arbitrator who had resigned, or, in the alternative, to direct INA to appoint a replacement was proper. Among other things, that decision avoided the waste entailed in convening a new panel after the remaining arbitrators had already engaged in significant proceedings in the case. Insurance Co. of North America v. Public Service Mutual Insurance Co., No. 09-3640 (2d Cir. June 23, 2010).

This post written by Brian Perryman.

In a dispute centered on retroactive credit card interest-rate increases, Mr. and Mrs. Puleo, on behalf of those similarly situated, appealed the District Court’s decision that the enforceability of an Arbitration Agreement’s ban on class actions was a question of arbitrability for the court to decide. The Puleos argued that the District Court should never have addressed the unconscionability of the class action waiver and instead should have left the issue to be decided by the arbitrator. The Third Circuit Court of Appeals, following the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 US 79, 84 (2002), concluded that the challenge to the class action waiver in the concededly valid arbitration agreement did not raise an issue of arbitrability, and thus should have been decided by the arbitrator. The Court reasoned that the parties’ agreement provided that all disputes should be arbitrated, and that this agreement included the claim that the agreement’s waiver of class arbitration was unconscionable. The Court noted that its decision was consistent with the Supreme Court’s recent opinion in Stolt-Nielsen S.A. v. AnimalFeeds, because it gave effect to the terms of the parties’ arbitration agreement. Puleo v. Chase Bank USA, N.A., Case No. 08-3837 (3d Cir. May 10, 2010).

This post written by John Black.