Arbitration Process Issues

The Third Circuit recently affirmed a lower court’s decision refusing car dealership defendants’ motion to compel arbitration pursuant to an arbitration agreement the plaintiffs were allegedly induced to sign. First, the court rejected the dealerships’ argument that the plaintiffs agreed to arbitrate because they signed the arbitration agreement.  It noted that a signed arbitration agreement does not necessarily demonstrate intent to be bound in all circumstances, nor did it negate plaintiffs’ argument they were induced to sign the agreement.  More importantly, the court held plaintiffs responded to the motion to compel with sufficient additional facts and evidence to place the arbitration agreement into dispute so as to warrant discovery whether the plaintiffs intended to be bound to arbitration.  Second, the court dismissed the dealerships’ claim that plaintiffs failed to specifically allege fraudulent inducement in signing the arbitration agreement rather than the contracts in whole, therefore requiring arbitration of the issue of arbitrability.  The court found plaintiffs specifically alleged the defense of fraud-in-the-inducement regarding the arbitration agreement, which, if proven, would be grounds to invalidate the arbitration agreement.  Therefore, the court affirmed and declined to compel arbitration.

Corchado v. Foulke Mgmt. Corp., No. 17-1433 (3d Cir. Dec. 21, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

Consumers filed a putative class action alleging statutory and common law consumer protection and false advertising claims under California and Alabama law, specifically alleging that AT&T falsely advertised their mobile service plans as “unlimited” when in fact it intentionally slowed data at certain usage levels. AT&T moved to compel arbitration pursuant the arbitration agreements included in their wireless data service plans and in light of the Supreme Court’s 2011 ruling in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act preempts state law deeming AT&T’s arbitration provision to be unconscionable.

Plaintiffs opposed the motion on First Amendment grounds, arguing that an order forcing arbitration would violate the Petition Clause because they “did not knowingly and voluntarily give up their right to have a court adjudicate their claims” and could not “bring their claims in small claims court.” The district court granted AT&T’s motion to compel arbitration, finding that there was no state action in this case to bring the dispute within the ambit of the First Amendment. After denying reconsideration, the district court granted plaintiffs’ motion to certify the order compelling arbitration for immediate interlocutory appeal, finding that there was substantial ground for difference of opinion as to whether state action existed under (1) Denver Area Edu. Telecom. Consortium, Inc. v. FCC or (2) the “encouragement” test. The Ninth Circuit granted permission to appeal.

On appeal, the Ninth Circuit read Denver Area narrowly, reasoning that the case “did not broadly rule that the government is the relevant state actor whenever there is a direct constitutional challenge to a “permissive” statute. The court also found unpersuasive plaintiffs’ argument that the Federal Arbitration Act, including judicial interpretations thereof, “encourages” arbitration such that AT&T’s actions are attributable to the state. The panel concluded, “[p]ermission of a private choice cannot support a finding of state action,” and “private parties [do not] face constitutional litigation whenever they seek to rely on some [statute] governing their interactions with the community surrounding them.” The Ninth Circuit affirmed the district court’s ruling. Roberts v. AT&T Mobility, Case No. 16-16915 (9th Cir. Dec. 11, 2017).

This post written by Gail Jankowski.

See our disclaimer.

While the FAA grants arbitrators authority to compel non-parties to appear before them and produce documents at a hearing, it does not authorize them to compel pre-hearing production. The Ninth Circuit Court of Appeals joined the Second, Third and Fourth Circuits in so holding. The Eighth Circuit, however, disagrees, having ruled previously that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” It is also worth noting, as the Ninth Circuit did, that “because arbitration is a creation of contract, arbitration agreements may provide arbitrators greater discovery powers with respect to the parties bound by such agreements.” CVS Health Corp. v. Vividus, LLC, Case No. 16-16187 (9th Cir. Dec. 21, 2017).

This post written by Benjamin E. Stearns.

See our disclaimer.

A Texas federal court determined that, pursuant to the parties’ contract, the dispute was not arbitrable because the plain language of the arbitration clause expressly excluded suits that involved requests for injunctive relief, despite the incorporation of the AAA Rules. The clause stated as follows:

This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.

Defendants argued that, “under the plain language of the clause, disputes about arbitrability do not fall within the carve-out and thus, belong to the arbitrator.” Plaintiff, on the other hand, argued that “the structure of the specific carve-out at issue here leads to the natural reading that the AAA Rules only apply to the category of cases that are subject to binding arbitration under the Dealer Agreement – namely, those outside of the contract’s express carve-out.”

The District Court held that the arguments for arbitrability were “wholly without merit” based on the plain language of the arbitration clause itself and thus fell squarely within the “wholly groundless” exception created by Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014). On appeal, the Fifth Circuit Court of Appeals affirmed, stating that, “[t]he mere fact that the arbitration clause allows [Plaintiff] to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning.”

Archer and White Sales, Inc. v. Henry Schein, Inc., et al., No. 16-41674 (5th Cir. Dec. 21, 2017).

This post written by Nora A. Valenza-Frost.
See our disclaimer.