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O’Dell v. Aya Healthcare Services: The Ninth Rejects Non-Mutual Offensive Collateral Estoppel as a Basis for Invalidating Arbitration Agreements

April 15th, 2026 Arbitration Agreement Invalid, Arbitration Agreement Unenforceable, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Challenging Arbitration Agreements, Class Action Arbitration, Class and Collective Proceedings, Contract Defenses, Delegation Agreements, Delegation Provision, Drafting Arbitration Agreements, Equal Footing Principle, FAA Chapter 1, FAA Section 13, FAA Section 2, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 13, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, First Principle - Consent not Coercion, Gateway Disputes, Gateway Questions, Issue Preclusion, Mass Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Preclusion Doctrines, Preclusive Effect of Awards, Res Judicata or Claim Preclusion, Section 13, Section 2, Section 3 Default, Section 3 Stay of Litigation, Section 4, United States Court of Appeals for the Ninth Circuit No Comments »

Introduction

non-mutual, offensive collateral estoppelIn O’Dell v. Aya Healthcare Services, Inc., No. 25-1528, slip op. at 2-3 (9th Cir. Apr. 1, 2026), the Ninth Circuit overturned a district court ruling that invoked non-mutual, offensive collateral estoppel to deem unconscionable hundreds of separate, bilateral arbitration agreements agreements between a corporate health care provider and its individual, nurse employees. O’Dell, a 3-0 opinion, is of  interest to entity and individual parties litigating gateway arbitrability disputes arising out of  mass, class, or collective proceedings.

Background

The case concerned wage-related claims asserted by travel-nurse employees against a healthcare provider, Aya Healthcare Services, Inc. (“Aya”). As a condition of employment, Aya required its employees to sign arbitration agreements containing similar terms. The agreements also contained delegation provisions that required an arbitrator, rather than a court, to decide arbitration-agreement validity disputes. Id. at 4-6. (You can read about delegation provisions here and here.)

The district court initially sent four named plaintiffs’ disputes to four separate arbitrations each to be decided by a different, individual arbitrator. The results were evenly split: Two arbitrators held the agreements unconscionable based on their fee allocation and venue provisions; the other two ruled that the agreements were enforceable, determining that a savings clause (presumably providing  for severability) cured any unconscionability problem. Id. at 6. The district court confirmed three of the four awards, refusing to confirm one of the awards because of Aya’s alleged failure to pay the arbitration fee.  Id.

After 255 additional plaintiffs opted into a Fair Labor Standards Act (“FSLA”) collective action, the district court declined to send their disputes to arbitration. Instead, invoking non-mutual, offensive collateral estoppel, the district court gave preclusive effect to the two arbitral rulings invalidating the agreements, refused to give the same effect to the two rulings upholding the agreements, and held that Aya was barred by collateral estoppel from enforcing the remaining agreements. Id. at 6-7.

The Court did not accord preclusive effect to the two awards that upheld the agreement to arbitrate, dismissing them as not “reasoned” or “thorough.” Id. at 7.

The Court of Appeals for the Ninth Circuit reversed and remanded.

Offensive, Non-Mutual Collateral Estoppel: The Question Presented

The Ninth Circuit considered whether “application of non-mutual offensive collateral estoppel to preclude the enforcement of arbitration agreements is compatible with the Federal Arbitration Act [(the “FAA”)].” Id. at 4. The Court said the answer was no. Id. at 4-5, 12-13.

The Ninth Circuit’s Analysis: Non-Mutual, Offensive  Collateral Estoppl is Incompatible with the FAA

The court’s reasoning was straightforward, but its implications are significant. It began with the FAA’s text.

FAA Section 2 provides, in pertinent part, that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. . . .  9 U.S.C. § 2. Under Section 2, “generally applicable contract defenses such as fraud, duress, or unconscionability” are “grounds for revocation.” Slip op. at 8 (quotations and citations omitted) But there were no such grounds here.

The Ninth Circuit explained that non-mutual offensive issue preclusion is not a “generally applicable contract defense” of the kind contemplated by Section 2’s savings clause. O’Dell, slip op. at 8-9 (quotations and citation omitted). For irrespective of whether a case concerns contract enforceability, this preclusion doctrine may, to avoid relitigation, accord certain judgments preclusive effect. “In other words,” said the Court, “the doctrine is not about contracts or contract defenses.”  It is a judge-made preclusion doctrine which—if used as it was here—would indirectly but effectively invalidate arbitration agreements that the FAA says should be enforced. Id. at 8-10.

It is not a ground for “revocation”—which is “‘[t]he recall of some power, authority, or thing granted, or a destroying or making void of some deed that had existence until the act of revocation made it void.’” Id. at 9 (quotations and citations omitted). “Revocation” under Section 2 “includes fraud, duress, and unconscionability[,]” but “does not pertain to a deficiency with respect to the formation of contracts. . . that might result in “revocation.” Slip op. at 9 (quotations and citations omitted).

Even assuming “revocation broadly encompasses the indirect but effective invalidation of the agreement through preclusion, And to the extent that “revocation broadly encompasses the indirect but effective invalidation of agreements through preclusion,” the doctrine would “contravene critical features of the FAA.” Slip op. at 9 (quotations and citations omitted).

The Court also considered context, considering Sections 3, 4, 10, and 13 of the FAA. Sections 3 and 4 require courts to stay litigation and compel arbitration in accordance with the parties’ agreement once the making of the agreement is not in issue. 9 U.S.C. §§ 3-4. Section 10 provides limited grounds for vacatur focused on defects in the arbitral process, such as corruption, fraud, or evident partiality. Id. § 10. In the Ninth Circuit’s view, nothing in that statutory scheme suggests that Congress contemplated a non-mutual preclusion doctrine that would frustrate arbitrations the parties had separately agreed to undertake. O’Dell, slip op. at 9-10. The court specifically rejected the employees’ reliance on Section 13, reasoning that Section 13 makes confirmed awards enforceable as judgments, but does not authorize using one confirmed award to abrogate distinct arbitration agreements involving other parties. Id. at 12-13.

Application of Offensive, Nonmutual Collateral Estoppel Violates Arbitration’s First Principle

The FAA’s first principle—consent, not coercion—provided the Court with a second— and perhaps in some ways, more important—rationale. (For a discussion of arbitration’s “first principle,” see here.) The FAA, the panel explained, presupposes that arbitration is a matter of consent, not coercion. Id. at 10-11 (citing Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 681 (2010); Lamps Plus, Inc. v. Varela, 587 U.S. 176, 184 (2019)). The employees’ preclusion theory disregarded this first principle. See slip op. at 10-11. As the Court explained, “[p]recluding an arbitration” to which “the parties agreed. . .— because a different arbitrator in a different proceeding had concluded that an agreement between different parties was unconscionable—would render the parties’ consent meaningless.” Slip op. at 11.

Using Offensive, Non-Mutual Collateral Estoppel to Impose a Bellwether Scheme without Party Consent

The court’s third rationale will likely attract the most attention. The district court’s ruling, the panel said, effectively transformed individualized arbitrations into a binding “bellwether” or class-like device without the parties’ consent. Id. at 5, 11-12. That is significant because Supreme Court precedent has repeatedly held that the FAA does not permit courts or arbitrators to impose class  procedures that alter the “fundamental attributes” of arbitration unless there is a contractual basis to do so. See Epic Sys. Corp. v. Lewis, 584 U.S. 497, 507-09 (2018) (quotation and citations omitted); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011); Stolt-Nielsen, 559 U.S. at 684-87. O’Dell extends that line of authority in an important way. It treats offensive non-mutual preclusion, when used to wipe out separate bilateral arbitrations, as another unauthorized claim aggregation scheme that is inconsistent with the FAA’s consent-based, bilateral structure. See O’Dell, slip op. at 11-13.

The Court said “the imposition here [of an aggregation mechanism] is more concerning than in” prior cases. See slip op. at 11. Because in ordinary class proceedings named representative plaintiffs must “adequately represent” class members. Slip op. at 11. Not so here. “Indeed,” said the Court, under the district court’s logic, just one  arbitration proceeding would be enough to preclude hundreds (or thousands) of other arbitration proceedings.” Slip op. at 12. “That,” remarked the Court, “is a class action stripped of all  its important protective features.” Slip op. at 12. Permitting offensive collateral estoppel to preclude agreed individual arbitrations from taking place “would supplant arbitrations with binding bellwether class actions lacking the procedural safeguards of ordinary class actions.” Slip op. at 12. That would violate the FAA. See Slip op. at 12.

The Court accordingly rejected “this new application of preclusion doctrine as it would be “fundamentally at war with the FAA and undermine Congress’s efforts to protect arbitration from judicial opposition.” Slip op. at 12 (citation omitted).

Implications of the Decision

O’Dell is important for at least three reasons. First, it clarifies that FAA Section 2’s saving clause authorizes only generally applicable contract defenses, not equitable doctrines which apply to litigation generally, as opposed to contract actions specifically. That is especially so, where, as here, the doctrine may, as applied, interfere with arbitration’s key attributes or is otherwise incompatible with arbitration.

Second, O’Dell reminds us that, pursuant to delegation agreements, and in the absence of contractual consent to the contrary, gateway arbitrability disputes are disputes between the parties to the particular individual arbitration agreement at issue. They are, in the absence of an agreement to the contrary, to be decided in an arbitration between those parties, not by proxy using  a bellwether aggregation device.

Here, the district court had already enforced the delegation clauses as written by sending the first four validity disputes to arbitration. Id. at 5-6. Once those arbitrations produced mixed results, the district court used the two invalidity awards as a shortcut to avoid further arbitrations. The Ninth Circuit rejected that move. In practical terms, where the parties have agreed to arbitrate gateway validity questions one by one, courts may not convert a few early rulings into a substitute for resolving each of the remaining individual arbitrations. See slip op. at 10-12.

Third, O’Dell has implications for collective, coordinated, and mass arbitration litigation. Plaintiffs’ counsel will often look for ways to convert favorable early rulings into leverage across a broader claimant pool. Defendants, too, sometimes seek global effect from threshold rulings. O’Dell does not foreclose contractual bellwether arrangements or other consensual aggregation mechanisms. But it does show that courts may not impose them through non-mutual offensive issue preclusion when the parties agreed to bilateral arbitration. Id. at 11-13.

Conclusion

O’Dell should be read as an important Ninth Circuit reaffirmation of three connected FAA principles: arbitration agreements must be enforced according to their terms; not all defenses are generally applicable contract defenses, and arbitration remains a matter of consent, not coercion. Where parties agreed to bilateral arbitration, courts may not use non-mutual offensive collateral estoppel to create a de facto class, bellwether, or other aggregation mechanism to which the parties never agreed.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

International Institute for Conflict Prevention and Resolution (CPR) Interviews Professor Angela Downes, Richard D. Faulkner, and Philip J. Loree Jr. about the Heckman v. Live Nation Entertainment Ninth Circuit Mass Arbitration Decision

November 13th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Agreement Invalid, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Challenging Arbitration Agreements, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, CPR Alternatives, CPR Video Interviews, Delegation Agreements, FAA Chapter 1, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, International Institute for Conflict Prevention and Resolution (CPR), Mass Arbitration, New Era ADR, Petition to Compel Arbitration, Philip J. Loree Jr., Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Angela Downes, Professor Downes, Repeat Players, Richard D. Faulkner, Russ Bleemer, Section 2, Section 4, The Loree Law Firm, Unconscionability, United States Court of Appeals for the Ninth Circuit 1 Comment »

CPR Interview

Heckman

Do you want to learn more about the Heckman mass arbitration case?

As readers may know, over the last four years or so, our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), has hosted presentations about significant arbitration-law developments (principally in the United States Supreme Court) that feature interviews of our friends and colleagues: Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; arbitrator, mediator, arbitration-law attorney, and former judge, Richard D. Faulkner; and yours truly, Loree Law Firm principal, Philip J. Loree Jr. (See, e.g., here, here, here, and here.) These interviews are posted on CPR’s YouTube channel, @CPRInstituteOnline.

On Monday, November 11, 2024, Russ interviewed Professor Downes, Rick and me about the Ninth Circuit’s recent mass-arbitration decision in Heckman v. Live Nation Entertainment, No. 23-55770, slip op. (9th Cir. Oct. 28, 2024). The video is here.

Heckman

The Heckman case centered around unusual mass-arbitration rules promulgated and administered by New Era ADR, which among many other things, included a broad delegation provision, which delegated to the arbitrator the authority to decide the validity of the parties’ arbitration agreement. The parties’ online ticket purchase agreement terms (the “Terms”) provided for arbitration pursuant to the New ERA Rules, which in the Heckman case meant New Era’s Rules for Expedited/Mass Arbitration proceedings.

Plaintiffs commenced in 2022 a putative class action against Live Nation Entertainment and Ticketmaster LLC, alleging that the companies violated the Sherman Act by engaging in anticompetitive practices. Those defendants  moved to compel arbitration, but the district court denied the motion, holding that the delegation clause and the arbitration agreement were procedurally and substantively unconscionable under California law.

Circuit Judge Lawrence VanDyke wrote a very interesting concurring opinion in Heckman in which he said he would have decided the case solely on the ground that the arbitration scheme violated the Discover Bank Rule, which was not preempted by the FAA because the scheme was not arbitration as envisioned by the FAA in 1925. This concurring opinion also discussed in some detail the conflict of interest that arises when arbitrators deciding arbitrability under a delegation clause conclude, or have reason to conclude, that an arbitration provider’s scheme—it’s business model—is unenforceable, pitting the arbitrator’s financial interest in continued employment against his or her neutral-decision-making interests.

Russ, Rick, Angela, and I discuss various aspects pertinent to the Heckman decision in the interview and identify issues that are likely to arise in future cases following the decision.
As always, we express our gratitude to Russ and CPR for hosting these interviews, and, along with Angela and Rick, look forward to contributing to future programs hosted by CPR.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other commercial and business matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

The Businessperson’s Federal Arbitration Act FAQ Guide III: Pre-Award Federal Arbitration Act Litigation – Gateway Questions about Whether Arbitration Should Proceed (Part I)

January 29th, 2020 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Businessperson's FAQ Guide to the Federal Arbitration Act, Clear and Unmistakable Rule, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Fraud, Nuts & Bolts, Nuts & Bolts: Arbitration, Rescission and Reformation, Separability, Severability 3 Comments »
Arbitration Law | Gateway Questions | Arbitrability

This third instalment of the Businessperson’s Federal Arbitration Act FAQ Guide concerns pre-award litigation under the Federal Arbitration Act (the “FAA” or the “Federal Arbitration Act”) and focuses on so-called “gateway” disputes about whether arbitration should proceed.

What is the Difference between Pre-Award and Post-Award Litigation under the Federal Arbitration Act?

The Federal Arbitration Act contains certain remedial provisions that are designed to address specific problems that arise before an arbitrator or arbitration panel makes a final award on matters submitted (or allegedly submitted) to arbitration. The litigation these provisions authorize is “pre-award” FAA litigation. Other provisions of the Federal Arbitration Act apply only to arbitration awards. The litigation those other provisions authorize is “post-award” FAA litigation.

Sections 3, 4, 5, and 7 of the FAA, concerning stays of litigation in favor of arbitration, motions to compel arbitration, the appointment of arbitrators, and the enforcement of subpoenas issued by arbitrators. They therefore pertain to pre-award FAA litigation.

Section 8 allows a party to invoke the Court’s admiralty jurisdiction “by libel and seizure of the vessel or other property of the other party. . . ,” and subsequently to obtain an order directing parties to proceed to arbitration, with the court “retain[ing] jurisdiction to enter its decree upon the award. . . .” Section 8 thus authorizes both pre-award and post-award relief, albeit only in cases falling under the admiralty jurisdiction.    

Sections 9, 10, 11, 12, and 13, which concern motions to confirm, vacate, or modify awards, pertain to post-award FAA litigation.

What are Gateway Questions?

A “gateway” question is one which “determine[s] whether the underlying controversy will proceed to arbitration on the merits.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Disputes raising gateway questions arise when one party fails or refuses to proceed to arbitration or asserts that it is not required to proceed to arbitration on the merits.

For example, suppose A and B, parties to a contract containing an FAA-governed  arbitration agreement find themselves embroiled in a dispute. A thinks the arbitration agreement does not require it to submit the dispute to arbitration but B disagrees.

A accordingly commences litigation in a federal district court, which has subject matter jurisdiction because the parties are citizens of different states and the amount of A claim against B exceeds $75,000, exclusive of interest and costs. 

B moves the court under FAA Section 3 to stay litigation in favor of arbitration, and under Section 4 to compel arbitration. 9 U.S.C. §§ 3 & 4.

The dispute between A and B over whether B is required to arbitrate the dispute presents a gateway question because it will determine whether A’s and B’s dispute on the merits will proceed to arbitration.

Who Decides Gateway Questions?

Some gateway questions are for the courts, with the answer determining whether the Court directs the parties to proceed to arbitration on the merits. Other gateway questions are for the for the arbitrator (or arbitration panel), and the Court simply directs the parties to submit their gateway question to arbitration, the arbitrator decides the question, and, if the answer to the gateway question is that arbitration on the merits may proceed, then the arbitrator decides the merits.

Whether or not a court or an arbitrator decides a particular gateway question depends on whether or not the question is a “question of arbitrability.”

The term “question of arbitrability” is a term of art. The Federal Arbitration Act embodies and implements a federal policy in favor of arbitration, applicable in both state and federal courts. See, e.g., Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 501 (2012). But arbitration’s “first principle” is that arbitration is “strictly a matter of consent,” Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415-16 (2019) (citation and quotations omitted), and “a party cannot be required to submit to submit to arbitration any dispute which he has not agreed so to submit.” Steelworkers v. Warrior Gulf Nav. Co., 363 U.S. 574, 582 (1960); see also First Options of Chicago v. Kaplan, 543 U.S. 938, 942-943 (1995); Howsam, 537 U.S. at 83.

Courts presume that the question “whether the parties have submitted a particular dispute to arbitration” to be a “question of arbitrability,” which is for the Court to decide unless the parties “clearly and unmistakably” agree otherwise. Howsam, 537 U.S. at 83 (quotations and citations omitted).

This, however, is an “interpretive rule” that is narrower than might first appear. Howsam, 537 U.S. at 83. The Supreme Court has said “[l]inguistically speaking, one might call any potentially dispositive gateway question a “question of arbitrability,” but “for purposes of applying the interpretive rule, the phrase ‘question of arbitrability’ has a far more limited scope.” Howsam, 537 U.S. at 83.

The term “question of arbitrability” is “applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they  had agreed that an arbitrator would do so, and consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well have not agreed to arbitrate.” Howsam, 537 U.S. at 83-84.

Questions of arbitrability thus turn on whether: (a) the dispute is legally capable of resolution by arbitration; (b) the scope of an arbitration agreement, that is, whether the parties agreed to arbitrate particular controversy or type of controversy; (c) the validity or enforceability of an arbitration agreement “upon upon such grounds as exist at law or in equity for the revocation of any contract[,]” 9 U.S.C. § 2; or (d) whether an arbitration agreement has been formed or concluded, that is, whether an arbitration agreement exists in the first place. See Howsam, 537 U.S. at 84 (citing examples and cases); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 530 (2019) (“To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”); Compucredit Corp. v. Greenwood, 565 U.S. 95, 104 (2012) (finding federal statutory claims arbitrable “[b]ecause the [statute] is silent on whether claims under the [statute] can proceed in an arbitra[l] forum, [and accordingly] the FAA requires the arbitration agreement to be enforced according to its terms”); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 296-97, 299, 303 (2010) (“[O]ur precedents hold that courts should order arbitration of a dispute only where the court is satisfied that neither the formation of the parties’ arbitration agreement nor (absent a valid provision specifically committing such disputes to an arbitrator) its enforceability or applicability to the dispute is in issue.”)

But not every question about what a party agreed to arbitrate is, within Howsam’s interpretive rule, a “question of arbitrability” presumptively for the court to decide. The term “question of arbitrability” is “not applicable in other kinds of general circumstance where parties would likely expect that an arbitrator would decide the gateway matter.” Howsam, 537 U.S. at 84 (emphasis in original).

One such “general circumstance” concerns “procedural questions which grow out of the dispute and bear on its final disposition,” which are “presumptively not for the judge, but for an arbitrator, to decide.” Howsam, 537 U.S. at 84 (emphasis in original) (quotations and citation omitted). Likewise, “allegation[s] of waiver, delay and like defenses to arbitrability[,]” are presumptively for the arbitrator. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Howsam, 537 U.S. at 84.

Gateway questions concerning conditions precedent and other “prerequisites” to arbitration, “such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate” are also presumptively for arbitrators, not courts. See Howsam, 537 U.S. at 84-85 (emphasis deleted; quotations omitted) (quoting Revised Uniform Arbitration Act of 2000 (“RUAA”) § 6(c), and comment 2, 7 U.L.A. 12-13 (Supp. 2002)).

While Howsam distinguishes between “questions of arbitrability” and questions which are not questions of arbitrability, sometimes courts distinguish between “issues of “substantive arbitrability,” which are presumptively for the Court, and “issues of procedural arbitrability,” which are presumptively for the arbitrators to decide. See Howsam, 537 U.S. at 85 (quoting RUAA § 6, comment 2, 7 U.L.A. 13) (quotations omitted).  

How do Parties Clearly and Unmistakably Agree to Submit Questions of Arbitrability to Arbitrators?

The presumption that courts get to decide arbitrability questions can be rebutted if the parties clearly and unmistakably submitted (or agreed to submit) those questions to arbitrators. See First Options, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). As a practical matter that means the party seeking to arbitrate an arbitrability question must show that the parties: (a) unambiguously agreed to submit questions of arbitrability (or questions concerning the arbitrators’ “jurisdiction”) to the arbitrators; or (b) during an arbitration unreservedly  submitted to the arbitrator an arbitrability question to arbitration. See First Options, 543 U.S. at 944-46.

Unreservedly submitting a question to the arbitrator means that both parties argue the merits of the arbitrability question to the arbitrator without either party informing the arbitrator that it believes it did not agree to submit the arbitrability question to the arbitrator and that any decision the arbitrator makes on that issue will be subject to independent (non-deferential) review by a court on a motion to vacate the award. First Options, 543 U.S. at 944-46.

Suppose the Court has compelled Parties A and B from our earlier hypothetical to arbitrate their breach of contract claim, which arises out of B’s alleged breach of Contract 1. During the arbitration Party A requests that the arbitrator determine whether Party B breached not only Contract 1, but a different contract, Contract 2, which does not contain an arbitration agreement. B argues to the arbitrator that it did not agree to arbitrate A’s claim for alleged breach of Contract 2, and that, in any event, it did not agree to arbitrate arbitrability questions, which are for the Court to decide.

Under those facts, Party A did not unreservedly submit to the arbitrator arbitrability questions because it argued that the arbitrator did not have the authority to decide arbitrability questions. If the arbitrator decides that Party A agreed to arbitrate claims arising out of A’s breach of Contract 2, then Party A should be entitled to independent (non-deferential) review of the arbitrability question by the Court on a motion to vacate the arbitration award. See First Options, 543 U.S. at 944-46.

That said, A would have been well-advised not only to argue that the arbitrator had no authority to resolve arbitrability questions, but to explicitly advise the arbitrator in writing that all of its arguments concerning the arbitrability of the Contract 2 breach claim, and the arbitrator’s power to decide arbitrability questions, were made under a full reservation of A’s rights to obtain independent, judicial review of those questions.   

Now suppose the same basic scenario, except that A does not argue that the arbitrator has no authority to decide arbitrability questions, and clearly and unmistakably represents to the arbitrator that it is submitting the merits of the arbitrability question for a final and binding determination by the arbitrator, without reservation of any right it might otherwise have to independent judicial review of that question. Under that scenario, A will have unreservedly submitted the arbitrability question to arbitration and will not be entitled to independent review upon a timely motion to vacate the award.

While the notion of agreeing to arbitrate arbitrability questions may seem odd to the uninitiated (which is why the clear and unmistakable requirement exists in the first place), such agreements are not uncommon. For example, an unambiguous agreement to arbitrate according to an arbitration-provider’s rules that clearly provide for arbitration of arbitrability questions generally will satisfy the clear and unmistakable requirement.  See, e.g., Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1245-46 (10th Cir. 2018); Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir.2005); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir.1989). The rules of leading arbitration providers provide that arbitrators decide such questions. See, e.g., American Arbitration Association, Commercial Rules and Mediation Procedures, Including Procedures for Large, Complex Commercial Disputes, R. 7(a); JAMS Comprehensive Arbitration Rules and Procedures, R 11(c); International Institute for Conflict Prevention & Resolution (“CPR”) 2007 Non-Administered Arbitration Rules, R. 8.

Agreements to arbitrate arbitrability questions are often referred to as “Delegation Provisions” or “Delegation Agreements.” (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, here, and here.)

Typically, a “Delegation Provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. For example, by making part of their contract Rule 8.1 of the 2018 version of the International Institute for Conflict Prevention and Resolution (CPR)’s Non-administered Arbitration Rules, parties agree to the following broad Delegation Provision:

Rule 8: Challenges to the Jurisdiction of the Tribunal

8.1 The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. This authority extends to jurisdictional challenges with respect to both the subject matter of the dispute and the parties to the arbitration.

CPR Non-Administered Arbitration Rule 8.1 (2018) (emphasis added).

Are there any Arbitrability Disputes that Courts Decide when the Contract at Issue Clearly and Unmistakably Provides for the Arbitrator to Decide Questions of Arbitrability?

Yes. But to understand why, when, and to what extent that is so, we need to understand that: (a) typically a clear and unmistakable Delegation Agreement or Delegation Provision is part of the parties’ arbitration agreement; (b) the arbitration agreement, and the Delegation Agreement it contains, is also, in turn, ordinarily part of a larger agreement; and (c) the Federal Arbitration Act doctrine of “separability” requires Courts to consider each of those three agreements as separate and independent from the other two. See Rent-A-Center v. Jackson, 561 U.S. 63, 70-75 (2010) Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 448-49 (2006); Prima Paint v. Flood Conklin, 388 U.S. 395, 403-04, 406-07 (1967).

Within this “separability” framework, Courts always decide whether a Delegation Agreement was formed and exists. See Henry Schein, 139 S. Ct. at 530.

Ordinarily, that does not present problems from the standpoint of the separability doctrine. For example, suppose A signs a contract under which B undertakes to perform services for A. The contract contains an arbitration agreement as well as a Delegation Agreement. But the contract is signed by C, purportedly as agent for B, not by B itself. As it turns out, B never authorized C to sign the contract on its behalf, and C did not have apparent or inherent authority to sign for B.

B (understandably) does not perform the contract, and A demands arbitration against B. B refuses to arbitrate, contending that it never entered into the contract because C was not authorized to act on B’s behalf.

A then brings an action in court seeking to compel B to arbitrate, B asserts it is not obligated to arbitrate because it never agreed to do so, and A contends that, in any event, the Court must compel arbitration of the issue whether the contract exists because of the Delegation Agreement in the contract C signed. B counters that just as it never agreed to the arbitration agreement, so too, it never agreed to the Delegation Agreement.

In this hypothetical, B wins—the Court would determine whether C was authorized to act on behalf of B, and would presumably conclude that A and B never entered into a contract, let alone an arbitration or Delegation Agreement.

Courts also decide whether a Delegation Agreement is valid, but only when the challenge to the Delegation Agreement relates specifically to the Delegation Agreement itself, not just the contract containing the arbitration and Delegation Agreements, and not just the arbitration agreement containing the Delegation Agreement. See Rent-a-Center, 561 U.S. at 70-75.

Suppose C was authorized to act on behalf of B, but further suppose that C made fraudulent representations to A about B’s qualifications, experience, and ability to perform the services that B undertook to perform for A. A entered into the contract, reasonably and justifiably relying on C’s false representations, which were made on behalf B.

A discovers the fraud and sues B, seeking rescission of the contract. A demands arbitration but B says it is not required to arbitrate because if A prevails on the rescission claim, then it means the arbitration and Delegation Agreements will also be rescinded, and the arbitrator’s conclusion will demonstrate that she had no authority to decide the matter in the first place.

This time A wins. Under the doctrine of separability the contract itself is separate from its arbitration and delegation agreements. See Buckeye Check Cashing, 546 U.S. at 448-49; Prima Paint, 388 U.S. at 403-04, 406-07. Because the alleged fraud does not specifically relate to the arbitration agreement, and because the arbitration agreement is at least arguably broad enough to encompass the fraud claim, the Court will direct the parties to arbitrate the rescission claim. See 546 U.S. at 448-49; 388 U.S. at 406-07.

Now let’s change the facts yet again. This time A demands arbitration against B and B resists arbitration on the ground that the arbitration agreement is unconscionable on state law grounds because it limits the number of depositions that may be taken. A counters that the unconscionability claim directed at the arbitration agreement is a question of arbitrability that, under the Delegation Agreement, must be submitted to the arbitrator for decision. B does not contend that the Delegation Agreement itself is unconscionable because the arbitration agreement limits deposition discovery.

A wins again. Under the doctrine of separability the Delegation Agreement is separate from the arbitration agreement and, consequently, a challenge to the validity of the arbitration clause, which does not specifically relate to the delegation agreement, does not affect the parties’ obligations to arbitrate arbitrability. See Rent-a-Center, 561 U.S. at 70-75.

While the arbitration agreement limits deposition discovery, B did not (and probably could not) demonstrate that the arbitration agreement’s limits on deposition discovery would provide an independent basis for finding the Delegation Agreement unconscionable. To show that the unconscionability argument was specifically directed at the Delegation Agreement, B would have had to demonstrate not only that the limits on deposition discovery applied to arbitrability determinations made under the Delegation Agreements, but that it was unconscionable for A to have required B to agree to allow the arbitrator to make arbitrability determinations with only limited deposition discovery. See Rent-a-Center, 561 U.S. at 71-75.

It is one thing to argue that such a limitation on deposition discovery might be unconscionable in an agreement to arbitrate factbound disputes on the merits, but it is another to argue that the same principle applies equally to a agreement to arbitrate arbitrability disputes, which courts commonly decide without the need for deposition discovery. See Rent-a-Center, 561 U.S. at 71-75.

More to come….

In Part II of “Gateway Disputes about Whether Arbitration Should Proceed” we will begin by addressing the question, “What is the presumption of arbitrability?”  

Please note. . .

This guide, including the instalments that will follow in later posts, and prior instalments, is not designed to be a comprehensive recitation of the rules and principles of arbitration law. It is designed simply to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.

This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they voluntarily elect to do so.

If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should contact an experienced and skilled attorney with a solid background in arbitration law.

About the Author

Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitrations and litigations.

Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and frequently serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.

Loree & Loree was recently selected by Expertise.com out of a group of 1,763 persons or firms reviewed to be one of Expertise.com’s top 18 “Arbitrators & Mediators” in New York City for 2019, and now for 2020. (See here and here.)

You can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Oxford Health Plans LLC v. Sutter—SCOTUS Reaffirms FAA Section 10(a)(4) Manifest Disregard of the Agreement Outcome Review Standard and Elaborates on Its Scope: Part II.C

August 19th, 2013 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Practice and Procedure, Unconscionability, United States Supreme Court Comments Off on Oxford Health Plans LLC v. Sutter—SCOTUS Reaffirms FAA Section 10(a)(4) Manifest Disregard of the Agreement Outcome Review Standard and Elaborates on Its Scope: Part II.C

Part II.C

Does Oxford Portend Judicial Reconsideration of

Whether Class-Arbitration Consent is a Question of Arbitrability?      

In Stolt-Nielsen and Oxford the parties voluntarily submitted the class-arbitration-consent question to arbitrators because a four-Justice plurality ruled in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), that the class-arbitration-consent issue was not a question of arbitrability for the court to decide.   While “courts assume that the parties intended courts, not arbitrators” to decide certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” the Court found that the issue did not fall into “this narrow exception.” 539 U.S. at 452 (citations omitted).  According to the Court, “the relevant question . . . is what kind of arbitration proceeding the parties agreed to:”

That question does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question. Given these considerations, along with the arbitration contracts’ sweeping language concerning the scope of the questions committed to arbitration, this matter of contract interpretation should be for the arbitrator, not the courts, to decide.

539 U.S. at 452-53 (citations omitted).

Bazzle was well received by the lower courts, and even though it was only a plurality opinion, many courts, parties and practitioners apparently thought that the arbitrability of consent-to-class-arbitration was a foregone conclusion after Bazzle even though the plurality’s rationale was endorsed by only four justices – a hat-tip to Associate Justice Stephen G. Breyer’s clearly and persuasively written plurality opinion. Some also apparently thought that Associate Justice John Paul Stevens’ concurring opinion was, for all intents and purposes, an endorsement of the plurality’s rationale, and that accordingly, Bazzle established precedent binding on the lower courts.

In 2003, prompted in part by Bazzle, the American Arbitration Association promulgated its Supplementary Rules for Class Arbitrations, Rule 3 of which directs the arbitrator or panel to “determine as a threshold matter, in a reasoned, partial, final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.  .  .  .”  AAA Supplementary Rules, Rule 3.  The “Clause Construction” awards in Stolt-Nielsen and Oxford were made under Rule 3 of the AAA Supplementary Rules.

In light of Bazzle and the AAA Supplementary Rules, class-arbitration-consent-related disputes in cases where the relevant arbitration agreements did not expressly prohibit class arbitration – e.g., cases not involving class-arbitration waivers – were generally submitted to arbitration, usually pursuant to the AAA Supplementary Rules.  Most of the class-arbitration-related litigation concerned challenges to class arbitration waivers, rather than the arbitrability of class-arbitration-consent-related issues.

But Stolt-Nielsen explained that Bazzle did not establish binding precedent on any issue—including class-arbitration-consent arbitrability—because it “did not yield a majority decision.  .  .  .” See Stolt-Nielsen, 130 S. Ct. at 1772.  The Court said that “[u]nfortunately the opinions in Bazzle appear to have baffled the parties in this case at the time of the arbitration proceeding[,]” because “[f]or one thing, the parties appear to have believed that the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration.”  Stolt-Nielsen, 130 S. Ct. at 1772 (citation omitted).  The Court did “not revisit that [allocation of decision-making power] question [in Stolt-Nielsen] because the parties’ supplemental agreement expressly assigned this issue to the arbitration panel, and no party argues that this assignment was impermissible.”  Id.

The Court underscored that same point in Oxford, noting that it “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability,’” an issue “Stolt-Nielsen made clear that [the Supreme Court] has not yet decided.  .  .  .”  Oxford, Slip op. at 4 n.2.    But Oxford gave the Court “no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.”  Id.   Oxford submitted the issue to arbitration “not once but twice—and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.”  Id. Continue Reading »

SCOTUS Decides AT&T Mobility LLC v. Concepcion!

April 27th, 2011 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on SCOTUS Decides AT&T Mobility LLC v. Concepcion!

This morning the United States Supreme Court handed down its long-awaited decision in AT&T Mobility LLC v. Concepcion, No. 09-893, slip op. (April 27, 2011).  The Court held that the Federal Arbitration Act preempts California’s Discover Bank rule, which deems unconscionable class waivers in adhesive contracts under certain circumstances, because it “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.  .  .  .'”  Slip op. at 18 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).  (The majority, concurring and dissenting opinions are here.)    

Associate Justice Antonin Scalia wrote the majority opinion, joined by Chief Justice John G. Roberts and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr.  Justice Thomas wrote a concurring opinion and Associate Justice Stephen G. Breyer dissented, joined by Associate Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.  

Stay tuned for more….

AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

December 10th, 2010 Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

One of my favorite scenes from the movie My Cousin Vinny (1992) is Vincent Laguardia Gambini’s (a/k/a “Vinny’s”) opening statement in the criminal trial of his cousin and cousin’s friend, both of whom were arrested and mistakenly charged for murder and robbery while driving through Alabama.  Vinny (played by Joe Pesci) — a native New Yorker who is as out of place in a rural Alabama courtroom as I suppose anyone could be — dozes off during the prosecution’s opening statement only to be jarred awake by his cousin — who is facing the death penalty — so that he can deliver an opening statement.  He saunters over to the jury, and says, gesturing at the prosecutor, “Everything that guy just said is bull$#!+.  Thank you.”  Then he returns to the defense table.  (Watch the scene here, which begins approximately three minutes and 33 seconds into the clip.)     Continue Reading »

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part II

Introduction

Part I of this two-part post (here) briefly discussed the background of  AT&T Mobility LLC v. Concepcion, No. 09-893, a case pending before the United States Supreme Court that will be argued on November 9, 2010.  We now delve into the details of the preemption questions before the Court and take a guess at the outcome. 

Federal Arbitration Act Preemption

The Federal Arbitration Act does not preempt all state law applicable to arbitration agreements, but it expressly preempts state law that conflicts with Section 2, and impliedly preempts all state law that “stands as an obstacle to the accomplishment and execution of the full purposes of Congress”  embodied in the Federal Arbitration Act.  See Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 988 (9th Cir. 2007) (citations and quotation omitted). 

Does Section 2 of the Federal Arbitration Act Expressly Preempt the Discover Bank Rule?

Section 2 of the Federal Arbitration Act declares that arbitration agreements within its scope “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  Section 2 establishes substantive federal law that expressly preempts all conflicting state law, except for state law that permits “the revocation of any contract” or governs the formation, interpretation, or construction of contracts generally. 

The exception to federal preemption is exceedingly narrow, for it saves from preemption only state laws that apply equally across the board to all contracts.  The United States Supreme Court summarized it well when it said:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.  What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause.  The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act’s language and Congress’s intent.

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (citations and quotations omitted; emphasis in original).   Continue Reading »

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part I

Introduction

In our recent feature “What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule,” we briefly discussed AT&T Mobility LLC v. Concepcion, No. 09-893, a case which asks the United States Supreme Court to determine whether the Federal Arbitration Act preempts California’s Discover Bank rule.  The Discover Bank rule deems unconscionable class action and class arbitration waivers in adhesive contracts in circumstances where a consumer alleges that a party with superior bargaining power has committed widespread but small-dollar fraud.  Petitioner AT&T Mobility LLC (“AT&T Mobility”) has filed its brief (here); various organizations, including the Chamber of Commerce of the United States of America, have filed an impressive stack of amicus curiae briefs supporting AT&T Mobility (here); Vincent and Liza Concepcion (the “Concepcions”) have filed their brief, which was posted online earlier today (here); and AT&T will presumably submit a reply brief.  The Court has scheduled argument for November 9, 2010. 

AT&T Mobility is an extremely important case because it will decide whether the Federal Arbitration Act preempts certain state law unconscionability and public-policy-based rules that are principally directed at class arbitration and class action waivers.  This issue has spawned a number of conflicting decisions in the state and federal courts, including Feeney v. Dell, Inc. 454 Mass. 192 (2009), a case we blogged back in 2009 (posts here and here). 

This two-part feature takes a closer look at AT&T Mobility, considers the principal issues before the Court, and ventures a guess on what the outcome will be.   This Part I discusses the background of the case, and Part II (here) outlines Federal Arbitration Act preemption rules, analyzes and explains why we believe the Federal Arbitration Act expressly and impliedly preempts the Discover Bank rule, and provides our best guess as to what the Supreme Court will conclude.     Continue Reading »

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

July 23rd, 2010 Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

After deciding Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. and Rent-A-Center West v. Jackson, the United States Supreme Court left federal arbitration law at a crossroads.  In both cases the Court adhered quite faithfully to its prior Federal Arbitration Act jurisprudence, under which it enforces arbitration agreements according to their terms, without regard to other considerations.  In Rent-A-Center the Court implicitly reaffirmed that these pro-enforcement rules apply equally to contracts of adhesion. 

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  — would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T Mobility.  Continue Reading »

Introducing Guest Blogger John (Jay) McCauley

June 23rd, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Guest Posts, Practice and Procedure, Unconscionability, United States Supreme Court Comments Off on Introducing Guest Blogger John (Jay) McCauley

Today we are pleased and honored to feature an article by our good friend John (Jay) McCauley, a distinguished arbitrator, mediator, attorney and professor of arbitration law.  Jay’s article is entitled “A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson,” and can be found here. 

Jay debunks the media hype surrounding the United States Supreme Court’s recent decision in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010), and argues (persuasively) that the case is a reasonable, natural and modest interpretation of the Court’s prior Federal Arbitration Act jurisprudence.  With one minor caveat we agree wholeheartedly with his insightful and pragmatic view of the case.

Our view of the decision may differ very slightly in that we believe that its scope is broader than the holding might suggest.  Jay is absolutely correct when he says that the decision permits parties to challenge delegation agreements (agreements to arbitrate arbitrability) on unconscionability grounds.  He says that there may be “dozens” of grounds on which to make such a challenge, and we think he is right about that, too. 

But we think that it will be very difficult to mount a successful challenge specifically directed at a delegation agreement.  And if we are right about that, then the practical effect of the decision will be that delegation agreements will usually be enforced, enabling arbitrators to decide most unconscionability challenges.  The scope of the decision is, in our view, therefore quite broad. 

We nevertheless agree with Jay that the decision makes perfect sense in light of the Court’s prior Federal Arbitration Act jurisprudence, and apart from our caveat about the decision’s scope, we are otherwise on the same page as Jay.  Of course, it may turn out that challenges to delegation agreements prove more successful than we think they will.

Jay is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates. 

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

We hope you enjoy Jay’s article.

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