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Arbitration / Court Decisions

Third Circuit Reverses Order Denying Motion to Compel Arbitration, Holds Arbitration Clause in Consumer Financing Agreement Is Enforceable

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In Mancuso v. MDG USA Inc., the Third Circuit Court of Appeals considered defendant MDG’s appeal of an order denying its motion to compel arbitration of the plaintiff’s lawsuit alleging violations of state and federal fair credit laws. The plaintiff purchased a laptop computer from MDG and signed a financing agreement requiring monthly payments on his account. A dispute arose regarding the remaining balance on the account, and after the plaintiff directed his bank to stop payment on the monthly charges to the account, MDG reported the plaintiff to credit agencies.

The plaintiff then filed a state court action in Pennsylvania alleging violations of state and federal fair credit laws. MDG removed the case to federal court and filed a motion to compel arbitration pursuant to the arbitration clause included in the financing agreement, which covered “any past, present, or future claim, dispute, or controversy … relating to or arising out of” the agreement. The plaintiff admitted he signed the financing agreement and his claims arose from the agreement, but argued that the agreement was “unenforceable because of fraud and unconscionability.” The district court denied MDG’s motion to compel without prejudice. The court concluded that it was not apparent from the face of the complaint whether the plaintiff’s claims were subject to arbitration and ordered limited discovery related to that issue.

In reversing the district court’s decision, the Third Circuit first noted that because the plaintiff did not dispute he had a valid contract with MDG, the court’s review was limited to “whether the arbitration clause itself — not the rest of the contract — is enforceable.” The court then rejected the arguments raised by the plaintiff in challenging the enforceability of the arbitration clause. The court concluded that the arbitration clause was not “hidden and minimized” and further noted that the plaintiff did not contend he was unaware of the clause when he signed the financing agreement. Further, the court rejected the plaintiff’s contention that the arbitration clause was confusing because of a numbering error, noting that the error was in the arbitration clause itself, which means that for the plaintiff to have even noticed the error, he would have to have read the arbitration clause. The court also rejected the plaintiff’s argument that the financing agreement was unconscionable because he could not alter its terms, noting that the arbitration provision was not procedurally unconscionable because it allowed the plaintiff to send MDG an “arbitration opt out notice.” The court then held that the plaintiff did not raise “a colorable legal issue of fraud, unconscionability, or unenforceability of the arbitration clause” and his claims were subject to the arbitration provision. The court reversed the district court’s denial of MDG’s motion to compel arbitration and directed the court to enter an order compelling arbitration of the plaintiff’s claims.

Mancuso v. MDG USA, Inc., No. 23-1963 (3d Cir. Feb. 7, 2024).

Pennsylvania’s “One-Document Rule” Invalidates Carvana’s Arbitration Agreement

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Dana Jennings and Joseph Furlong each bought a car from Carvana, a nationwide online used car dealer. On the day of their purchases, each signed three separate documents: a “retail purchasing agreement,” a “retail installment sales contract,” and an arbitration agreement.

The purchasers filed a class action lawsuit against Carvana alleging that Carvana breached a contractual promise to properly license, title, and register their vehicles with Pennsylvania. Carvana moved to compel arbitration, but the district court denied the motion, finding that the arbitration agreements were not enforceable under Pennsylvania’s Motor Vehicle Sales Finance Act because they were not expressly incorporated into the retail installment sales contracts signed by the purchasers.

On appeal, the Third Circuit affirmed. Under Pennsylvania’s Motor Vehicle Sales Finance Act, a contract governing an installment sale of a vehicle must: (1) be in writing; (2) contain all agreements between the buyer and the installment seller relating to the installment sale of the motor vehicle; and (3) be signed by the buyer and seller. The second requirement creates a so-called one-document rule, which provides that no other agreement is enforceable as part of the sale unless it is included within the installment sales contract, in this case, the retail installment sales contract.

But here, the arbitration agreements were separate from the retail installment sales contracts. In addition, the retail installment sales contract included an integration clause, which expressly stated that the contracts constituted the complete and exclusive agreements between the parties. Because of the integration clause, the parol evidence rule applied and precluded consideration of other written agreements entered into by the parties.

Carvana argued that because all the agreements were executed on the same day and as part of the same transaction, they should collectively be deemed one contract, which would render the arbitration agreements enforceable. The Third Circuit disagreed, pointing out that although the “same transaction concept” exists in Pennsylvania, the contracts relating to the same transaction are enforceable only if they reference or incorporate one another, which the agreements here did not do.

As a result, the Third Circuit affirmed the district court’s ruling that the arbitration agreements were unenforceable and remanded for further proceedings.

Jennings v. Carvana, LLC, No. 22-2948 (3d Cir. Mar. 21, 2024).

Fourth Circuit Holds That District Court Lacks Jurisdiction to Confirm Arbitration Award

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The Fourth Circuit Court of Appeals recently held that a district court lacked jurisdiction to confirm an arbitration award because the court did not have an independent basis for jurisdiction on the face of the application and could not “look through” to see if it had such jurisdiction.

An arbitration panel issued an award in favor of SmartSky Networks LLC. SmartSky moved to enforce that award. The district court confirmed the award and the parties who lost the arbitration appealed to the Fourth Circuit. They claimed that the district court lacked subject matter jurisdiction to confirm the award under the U.S. Supreme Court’s 2022 decision in Badgerow v. Walters, which held that to enforce or vacate an arbitration award under Sections 9 or 10 of the Federal Arbitration Act, a court “must have a basis for subject matter jurisdiction independent from the FAA and apparent on the face of the application” (i.e., the court cannot “look through” to see if it has jurisdiction in applications under Sections 9 or 10).

The Fourth Circuit agreed that the district court lacked jurisdiction:

At the time the parties filed their respective Section 9 and 10 applications, they were no longer litigating over their fraught business relationship — those issues and claims had been resolved by the Tribunal. Instead, the parties’ dispute focused on the enforceability of the arbitral award. To find it had jurisdiction over what was in essence a contract dispute among the parties, the district court had to “look through” to the civil lawsuit and determine that a federal claim existed.

The Fourth Circuit explained that the district court could not do that under Badgerow.

The Fourth Circuit also rejected SmartSky’s argument that the district court had jurisdiction because it had stayed the action pending arbitration and therefore retained jurisdiction. The court explained: “Section 8 [of the FAA] is the only section that expressly provides that a district court may ‘retain’ jurisdiction to enforce, vacate, or modify an award. Sections 9 and 10 do not contain such language and … do not provide any escape from Badgerow’s holding that there must be an independent basis for subject matter jurisdiction for applications.”

SmartSky Networks, LLC v. DAG Wireless, Ltd., No. 22-1253 (4th Cir. Feb. 13, 2024).

D.C. Circuit Affirms Decision Vacating and Remanding Arbitration Decision

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The D.C. Circuit Court of Appeals recently affirmed a district court’s decision to vacate and remand an arbitration decision in a case concerning companies’ withdrawal from a retirement fund.

For many years, various companies made contributions on behalf of their employees to the IAM National Pension Fund. Several of those companies decided to withdraw from the fund, however. Pursuant to the Multiemployer Pension Plan Amendments Act (MPPAA), the employers had to pay fees associated with their withdrawal. The fees were calculated by an actuary. Under the MPPAA, employers who seek to challenge the fees assessed must do so through arbitration. In this case, several employers initiated arbitration to dispute the fees.

The arbitrator concluded that the fund “erred in its calculations” by using certain assumptions and issued an array of other rulings. The fund sought to confirm in part and vacate in part the arbitrator’s award. The district court vacated the arbitration award and remanded the case to the arbitrator after ruling, in relevant part, that the actuaries had broader discretion to make assumptions that the arbitrator had concluded. The fund and several companies appealed.

The D.C. Circuit affirmed, holding that the district court “correctly found that the arbitrator erred in concluding that an actuary must use” certain assumptions and methods as of a particular date “when calculating withdrawal liability” under the MPPAA.

Trustees of the IAM National Pension Fund v. M&K Employee Solutions, LLC, No. 22-7157 (D.C. Cir. Feb. 9, 2024).

Ninth Circuit Compels Arbitration of Plaintiff’s Individual Labor Claims Under PAGA, Remands Non-Individual Claims

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In Johnson v. Lowe’s Home Centers LLC, the Ninth Circuit Court of Appeals affirmed a district court order granting defendant Lowe’s motion to compel arbitration of plaintiff Maria Johnson’s individual claims brought under California’s Private Attorneys General Act (PAGA) and remanded the district court’s dismissal of her non-individual claims for further consideration.

In connection with her employment with Lowe’s Home Centers, Johnson signed a contract that included a mandatory arbitration agreement in which she agreed that any controversy arising from her employment would be settled by arbitration. The contract also included a provision known as a “representative action waiver,” which barred the arbitration of disputes brought as a representative action or an action brought as a private attorney general action under PAGA. As the court explained, an “individual” PAGA claim asserts violations of California labor laws that impact the claimant personally, while a “representative” or “non-individual” PAGA claim is based on violations that impact other employees.

In November 2020, Johnson filed an action in California state court alleging individual and non-individual PAGA claims. Lowe’s removed the case to federal court and moved to compel arbitration of Johnson’s individual claim and to dismiss her non-individual PAGA claim. The district court granted Lowe’s motion in its entirety. The Ninth Circuit noted the district court’s dismissal of Johnson’s non-individual PAGA claims was consistent with California law as then interpreted by the U.S. Supreme Court in 2022 in Viking River Cruises Inc. v. Moriana, which interpreted a prior California Supreme Court decision as holding that pre-dispute waivers of both individual and non-individual PAGA claims were forbidden under California law and that “PAGA requires joinder of individual and non-individual claims, such that both claims must be tried in the same forum.” While Johnson’s appeal of the district court’s order granting Lowe’s motion was pending, the California Supreme Court issued its opinion in 2023 in Adolph v. Uber Technologies Inc. The Ninth Circuit noted that in Adolph, the California Supreme Court “corrected Viking River’s misunderstanding of PAGA,” holding that “[o]nly if there has been a final determination that the plaintiff’s arbitrated individual PAGA claim is without merit does the plaintiff lose statutory standing under PAGA to pursue his or her non-individual PAGA claims in court.”

With that backdrop, the Ninth Circuit then addressed whether the district court’s order compelling Johnson to arbitrate her individual PAGA claims was proper, and the impact of the Adolph decision on Johnson’s non-individual PAGA claims. The court concluded that the arbitration agreement between the parties, which included a severability clause, was valid and encompassed the claims at issue in the case. The court affirmed the district court’s order granting Lowe’s motion to compel Johnson to arbitrate her individual PAGA claims. In addressing the dismissal of the non-individual claims, the court vacated the order and remanded the non-individual claims to the district court to apply the California Supreme Court’s recent holding in Adolph, noting that Adolph held that “a plaintiff in a bifurcated representative PAGA claim still has statutory standing” … and that “[s]tanding under PAGA is not affected by enforcement of an agreement to adjudicate a plaintiff’s individual claim in another forum.”

Johnson v. Lowe’s Home Centers, LLC, No. 22-16486 (9th Cir. Feb. 12, 2024).