This week’s blog entry is going to be talking about several issues pertaining to arbitration. Before we do that though, I do want to let all my readers know that the ABA blawg 100 nominations are open again. I was very honored to be a part of the ABA Blawg 100 last year in the in the niche category and would be thrilled to be part of it again. We have had a great year. Our readership expands every month (we now consistently Monday through Friday get close to 150 visitors and 200 or more views a day). The nomination form is here. If you believe that this blog deserves another shot to be in the ABA Blawg 100 this year, do feel free to nominate it. Also, feel free to nominate, as I have done, other blogs that you enjoy reading. The deadline for submitting nominations is 11:59 PM on August 16, 2015. Many thanks for all your support!
Let’s talk about arbitration. In reviewing my blog entries, I see that there is only one blog entry talking about arbitration per se, and so it is time, perhaps past time, to have a blog entry devoted to arbitration. As is my usual practice, I have divided the blog entry into categories: what is arbitration?; can ADA claims be subject to arbitration?; might an arbitration agreement be considered unconscionable?; if a motion to compel arbitration is granted, does the case get dismissed or does the court just grant a stay until the arbitration is completed and why does it matter?; and takeaways. The reader is free to concentrate on any or all of the categories.
What Is Arbitration?
Arbitration differs from mediation. In arbitration, you have a neutral third-party that hears both sides of a dispute and then renders a decision in favor of one party or the other. It is very similar to what a judge does at trial. Discovery rules aren’t quite the same. The neutral third-party is selected by the contestants from a list supplied by the company doing the dispute resolution. Could be AAA or JAMS or others. It isn’t clear to me how AAA, JAMS, etc., find the arbitrators. As best as I can tell, they find you. The key difference between arbitration and mediation is that arbitration is a win lose situation (someone is going to win and someone is going to lose), while mediation involves a process that allows for a win-win solution. Sometimes, it is possible that things will start out in mediation and then wind up in arbitration for matters that can’t be worked out. Recently, in one of my LinkedIn forums that I am a part of, someone posted a discussion entry saying a law review article had just found that that people who sign arbitration agreements rarely bring claims. The theory being that the arbitration agreement itself discourages people from bringing a claim at all. I have not read that article yet, and so I can only speculate as to why this might be the case. Perhaps, plaintiffs believe that they won’t get a fair shake in the process. Perhaps, attorneys are just skittish about taking on such cases. There are probably other reasons as well. All of which brings us to three different cases discussing three different things important to know about the arbitration process.
Can ADA Claims Be Subject to Arbitration?
In Whit v. Prosper Funding LLC, the defendant operated a peer to peer lending service connecting potential borrowers with potential investors. It also services the loan on behalf of matched borrowers and investors. On September 1, 2014, the plaintiff, who is deaf, applied for a loan through the website. In the process of attempting to confirm his identity, the plaintiff called the defendant using a video relay service, which is a service allowing a deaf individual to communicate by telephone using a sign language interpreter as the medium between him or herself and the hearing party (I have used this service myself where I am the hearing party talking to a deaf client, and you would be amazed at how fast the whole system works, especially when compared to the old relay service system. True, it isn’t a perfect system when compared to a hearing person to a hearing person, but it comes close). The defendant informed the plaintiff that its policy was not to accept calls using a video relay service and that it would not accept his call on that basis. In connection with that policy, the defendant required the plaintiff to provide additional proof of identity and suspended his account. The plaintiff then brought suit alleging that such conduct violated the ADA and corresponding state and municipal statutes. Prior to submitting the application, the plaintiff had to click a box with a hyperlink consenting to the terms of the agreement. Those terms included a provision whereby the parties agreed to have any claim resolved by arbitration. Claims were defined to include: “any dispute, claim, or controversy (whether based on contract, tort, intentional tort, Constitution, statute, ordinance, common-law, or equity, whether pre-existing, present, or future, and whether seeking monetary, injunctive, declaratory, or any other relief)…,” arising from the agreement. Plaintiff had the ability to opt out of the above arbitration requirement by submitting to the defendant written notice of an intent to do so within 30 days after accepting the agreement, and the plaintiff did not submit such notification. When the plaintiff brought suit, the defendant filed a motion to compel arbitration.
The court held that the agreement was phrased in a way that was broad enough to include ADA claims. They also mentioned that 42 U.S.C. § 12212 specifically mentions that use of ADR, including arbitration, is encouraged to resolve disputes arising under the ADA.
Are There Situations When Arbitration Agreement Can Be Held Unconscionable?
The second issue faced by the court in Whit was whether the arbitration agreement was unconscionable. If the arbitration agreement is unconscionable, then the arbitration agreement can be thrown out by the courts. In this case, the court held that no such unconscionability existed because:
1. The agreement that the plaintiff consented to said that the defendant will pay all filing and administration fee charged by the administrator and arbitrator fees up to $1000, and the defendant will consider the plaintiff’s request to pay any additional arbitration costs.
2. If an arbitrator issues an award in the defendant’s favor, the plaintiff will not be required to reimburse the defendant for any fees the defendant previously paid to the administrator or for which the defendant is responsible. If the plaintiff receives an award from the arbitrator, the defendant will reimburse the plaintiff or any fees paid by the plaintiff to the administrator or arbitrator.
3. The plaintiff under the agreement was entitled to recover any fees paid to the arbitrator if he prevails in arbitration, while the defendant should it prevail was not entitled to recover such fees.
4. JAMS consumer standards said that when it comes to a consumer initiating arbitration against a company, the only be required to be paid by the consumer is $250, approximately the same as current court filing fees. All other costs must be borne by the company including any remaining JAMS case management fee and all professional fees for the arbitrator’s services.
What If an Arbitration Agreement Has a Clause in It That the Arbitration Award Cannot Be Challenged, Will That Fly?
Let’s say your arbitration agreement has a clause in it saying that the arbitration award cannot be challenged, is that kosher? This was exactly the issue faced by the Court of Appeals of Georgia in Atlanta Flooring Design Centers, Inc. v. R.G. Williams Construction, Inc., 2015 Ga. App. LEXIS 471 (Ga. App., Second Division, July 16, 2015). In this case, the arbitration agreement had a clause in it that said: “the award rendered by the arbitrator shall be final and binding on the parties and judgment upon the award may be entered in any court of competent jurisdiction. Contractor and subcontractor hereby expressly agree not to challenge the validity of the arbitration or the award.” Of course, the company that lost at arbitration challenged the award anyway saying that the clause violated the Georgia Arbitration Code, which tracks very closely federal statutes on the subject. In throwing out the clause, the court reasoned as follows:
1. Since Georgia closely tracks federal arbitration law and its statutes, the court looked to statutes interpreting the Federal Arbitration Act.
2. Under the Federal Arbitration Act, Congress intended to provide a minimum level of due process for parties to an arbitration. Therefore, permitting parties to contractually eliminate judicial review of awards contradicts the text of the Federal Arbitration Act, frustrates that intent, and leaves the party without any safeguards against abuse by the arbitrator.
3. The concurring opinion agreed with the outcome, but noted that even where challenges are allowed such challenges are limited to very specific situations and do not provide for relief even when there is no evidence to support the arbitrator’s award or the arbitrator has made an inadvertent error of law [under Georgia code, OCGA § 9-9-13(b) an arbitrator’s award can only be vacated if the court finds that the rights of that party were prejudiced by: 1) corruption, fraud, or misconduct in preparing the award; 2) partiality of an arbitrator appointed as a neutral; 3) and overstepping by the arbitrator of his or her authority for such imperfect execution so that a final and definite award upon the subject matter submitted could not be made; 4) a failure to follow the procedure laid out in the Georgia arbitration code unless the party applying to vacate the work continues with the arbitration with notice of this failure and without objection; or 5) the arbitrator manifestly disregarded the law.
If a Motion to Compel Arbitration Is Granted, Does the Case Get Dismissed or Does the Court Just Grant a Stay until the Arbitration Is Completed? Why Does It Matter?
In Katz v. Cellco Partnership, DBA Verizon Wireless, the US Court of Appeals for the Second Circuit was faced with this very question. Before proceeding with how they reasoned the way they did, the difference between dismissing the case and staying the case matters because if the case is dismissed, then the matter can be immediately appealed to a higher court. Whereas, if the case is just stayed pending arbitration, that is not a final decision of the court and therefore cannot be appealed at that time. Rather, a party would have to wait until the arbitration is completed and the court dismisses the case. In holding that the proper way to go about it was to stay pending arbitration the court reasoned as follows:
1. The court noted that the Supreme Court has yet to decide the issue. Further, the US Courts of Appeals that have visited the issue, are evenly divided on the question.
2. The Second Circuit has not precisely addressed this question previously.
3. Section 3 of the federal arbitration act provides that where a motion to compel arbitration is brought and the court is satisfied that the issue involved in such suit or proceeding is preferable to arbitration, the court, “shall an application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default proceeding with such arbitration.” To the court, “shall,” was a mandatory term creating obligations taking away any judicial discretion. Further, the court said that nowhere in the Federal Arbitration Act is that director abrogated or rendered discretionary.
4. A mandatory stay is consistent with the Federal Arbitration Act’s statutory scheme and pro arbitration policy. For example, the structure of the statute permits immediate appeal of orders hostile to arbitration but bars appeals of interlocutory orders favorable to arbitration. A dismissal essentially gets around that by making an order favorable to arbitration immediately appealable.
5. A mandatory stay is consistent with the Federal Arbitration Act’s underlying policy to move the parties to an arbitrable dispute out of court and to arbitration it quickly and easily as possible.
1. In our first case, Whit v. Prosper Funding LLC, providing the plaintiff can show That Prosper Funding LLC is a place of public accommodation, the plaintiff, in my opinion anyway, could very well win at arbitration due to the effective communication rule, which we have discussed previously.. Also, in this case, the court decided to dismiss rather than stay the proceeding pending arbitration, but since it is a part of the Second Circuit, I would expect for that decision to be reversed and a stay entered instead.
2. When it comes to arbitration agreements, unconscionability could either be procedural (the process is flawed), or it could be related to one party bearing too much of the costs. Unconscionability is not an easy showing to make.
3. Arbitration agreements must allow for the arbitrator’s award to be challenged, even if that challenge can only occur upon very limited grounds.
4. The courts are split on whether the granting of a motion to compel arbitration leads to a dismissal or to a stay of the proceedings until the arbitration is complete. The difference matters because it affects when things can be appealed. The Supreme Court is going to have to step in here and decide this. I do want to point out that it isn’t so obvious that the term “shall,” is mandatory. Many many years ago I attended a CLE by Brian Garner of LawProse, and I learned there that the term “shall,” can have seven different meanings. I was convinced that I knew what I was doing when it came to drafting my contracts (I was General Counsel to Tarrant County Mental Health and Mental Retardation Services at the time), and so when I went back to my office I checked on my contracts. I found that I was using the term to mean four different things, which I felt pretty good about since I have been told that it could mean up to seven different things. Ever since then, none of my contracts contain the word “shall,” in them.