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FOURTH CIRCUIT AFFIRMS FINDING THAT ARBITRATION AGREEMENT IN PAYDAY LOAN OBTAINED OVER THE INTERNET IS UNENFORCEABLE

May 31, 2017 by John Pitblado

Plaintiff electronically signed a contract which contained: (1) terms governing the loan; (2) an agreement to submit disputes to arbitration; and (3) a choice of law provision which required the application of Otoe-Missouria tribal law and disclaimed the application of state or federal law. The arbitration clause itself provided that “any dispute … will be resolved by arbitration in accordance with the law of the Otoe-Missouria Tribe of Indians.” The same disclosure about the application of Otoe-Missouria tribal law was included on the signature page.

Relying on the Circuit Court’s prior decision in Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2016), the district court concluded the contract denied the applicability of all federal and state law, holding the arbitration agreement unenforceable.

The Circuit Court reviewed, tasked with examining whether, as a matter of law, the “choice-of-forum and choice-of-law clause operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” As the language took the “plainly forbidden” step of prospectively waiving federal substantive rights, the choice of law provision was unenforceable as a matter of law and not severable from the rest of the arbitration agreement, because the choice of law provision went to the “essence” of the contract.

Dillon v. BMO Harris Bank, N.A., et al., NO. 16-1362 (4th Cir. May 10, 2017)

This post written by Nora A. Valenza-Frost.

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SIXTH CIRCUIT FINDS DISTRICT COURT ERRED IN RULING ON ARBITRATION WAIVER ISSUE WHERE ISSUES AS TO ARBITRABILITY WERE RESERVED FOR DECISION BY THE ARBITRATOR

May 30, 2017 by John Pitblado

The Plaintiff, Hilton, a computer purchaser, entered into a repayment agreement with Dell Financial Services, LLC, which later sold the debt to Midland Funding, to purchase a Dell computer on credit. The underlying issue in the case concerned Hilton’s claim brought in federal court that Midland Funding attempted to collect on time-barred debt in violation of the Fair Debt Collection Practices Act (FDCPA) after Midland sued Hilton in state court to collect on the outstanding balance. Midland moved to compel arbitration and dismiss the district court case, citing the Dell credit agreement’s arbitration provision.

The District Court for the Eastern District of Michigan held that Hilton’s claim was arbitrable, and that Midland did not waive its right to arbitrate by bringing a debt collection action in state court. The district court ordered the parties to proceed with arbitration of plaintiff’s claims pursuant to the arbitration provision and further ordered that, in lieu of staying the proceedings, the case be dismissed without prejudice. Hilton appealed both the district court’s decision to dismiss the case rather than stay the proceedings and its holding that Midland had not waived arbitration.

The Sixth Circuit affirmed the district court’s dismissal of the case, finding that the FAA requires a court to stay proceedings pending arbitration only “on application of one of the parties.” The panel found that absent a direct request to stay by Hilton, and because “neither party did more than vaguely reference the possibility of staying the proceedings,” the district court did not err by dismissing the case without prejudice.

With regard to whether Midland waived its right to arbitrate, the Sixth Circuit held that the district court should not have ruled on this issue because the arbitration provision delegated this question to the arbitrator and Midland elected to arbitrate. The panel agreed with Hilton’s argument that Midland could not simultaneously argue first, that the arbitration provisions gave authority to the arbitrator to determine whether it waived the right to compel arbitration and second, that the courts should determine whether arbitration was waived. As such, the panel found that the district court erred by deciding the waiver issue.

Hilton v. Midland Funding, No. 16-1556 (6th Cir. Apr. 28, 2017).

This post written by Gail Jankowski.

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THIRD CIRCUIT PERMITS LIMITED DISCOVERY ON ISSUE OF VALIDITY OF ARBITRATION AGREEMENT

May 23, 2017 by Rob DiUbaldo

In an unpublished opinion, the Third Circuit affirmed a decision denying a defendant bank’s motion to dismiss a consumer complaint in favor of arbitration when the contract containing the arbitration clause was not referenced in or attached to the complaint, agreeing that the plaintiff should be allowed to engage in limited discovery on the issue of the validity of the arbitration agreement.

The plaintiff, a customer of the defendant bank, sued alleging that the defendant’s overdraft protection program violated federal law and breached a contract with the plaintiff. According to the defendant, it had three contracts with the plaintiff: an account agreement, an overdraft protection agreement, and a service agreement related to electronic money transfers. The plaintiff alleged the existence of the account and overdraft protection agreements, but her complaint did not mention the service agreement, and the plaintiff filed a declaration stating that she had no recollection of seeing or agreeing to the service agreement. The account agreement did not contain an arbitration agreement and the overdraft protection agreement was not part of the record, such that the disputed service agreement was the only source of any provision purportedly requiring plaintiff to arbitrate the dispute.

The defendant argued that the trial court had “usurped the role of the arbitrator,” because, under the terms of the arbitration agreement, questions over the validity of the contract were for the arbitrator to decide. The Third Circuit disagreed, however, finding that the trial judge had not decided that the contract was invalid, but instead simply allowed limited discovery on the issue of arbitrability. Citing its earlier decision in Guidotti v. Legal Helpers Debt Resolution, LLC, the Third Circuit found that where “the parties’ agreement to arbitrate the dispute is not clear on the face of the complaint (or incorporated documents),” a motion to dismiss in favor of arbitration should be decided using a summary judgment standard. Because the service agreement – the only operative contract containing an arbitration clause – was not referenced in or attached the complaint, the existence of such a duty was not clear on the face of that complaint, and the plaintiff was entitled to limited discovery on the validity of and applicability of that agreement.

Horton v. FedChoice Federal Credit Union, No. 16-3960 (3d Cir. Apr. 25, 2017)

This post written by Jason Brost.
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SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

May 22, 2017 by Carlton Fields

Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.” The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
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ENGLISH HIGH COURT OF JUSTICE ANALYZES STANDARDS GOVERNING FRAUDULENT INDUCEMENT CLAIMS IN REINSURANCE DISPUTES

May 16, 2017 by Michael Wolgin

The Court of Appeal of England and Wales approved the judgment of the trial court in a reinsurance dispute between Axa and Arab Insurance Group (Arig) related to certain insured energy construction risks. The trial court had ruled in favor of Arig finding that, notwithstanding that an “unfair presentation of the risk” was made to Axa by Arig by failing to disclose past loss statistics, the latter failed to establish that its underwriter was induced to accept the ceded risks, i.e., Axa did not demonstrate that it “would have declined the risk if a fair presentation had been made” to it by Arig. The appellate court analyzed at length the evidence and testimony before the trial court related to the placement of the risks and the negotiation process. The court upheld the judgment, clarifying that the standard for evaluating non-disclosure includes both an objective component involving what a reasonable underwriter would conclude, and subjective components involving what the insured or broker would have said to the underwriter. The court made clear that whether the underwriter was induced turns on a subjective test; the fact that a reinsurer “could have been interested in something is irrelevant if in fact he would not have been.” Axa Versicherung Ag v. Arab Insurance Group, Case No. [2017] EWCA Civ 96 (Royal Courts of Justice Feb. 28, 2017).

This post written by Michael Wolgin.

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