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Arbitrator, not court, decides unconscionability issue - sometimes
March 30, 2005 by Ross Runkel at LawMemo
A franchise agreement contains an arbitration clause. The franchisee claims that both the arbitration clause and the whole agreement are unconscionable. Who decides these two issues? The court or the arbitrator?
The better rule is that the court decides whether the arbitration clause is a valid agreement, including issues of unconscionability. And the arbitrator decides whether the whole contract, in which the arbitration clause is embedded, is unconscionable.
So the 9th Circuit got it right in Nagrampa v. MailCoups, Inc (9th Cir 03/21/2005).
It all goes back to Prima Paint v. Flood & Conklin, 388 US 395 (1967), where Prima Paint claimed it was not bound by an agreement because it had been fraudulently induced. The US Supreme Court drew a clear line between (1) claims that the arbitration clause was fraudulently induced and (2) claims that the whole agreement was fraudulently induced.
Citing Federal Arbitration Act Section 4, the Supreme Court said "a federal court may consider only issues relating to the making and performance of the agreement to arbitrate," and must leave for an arbitrator the question of whether the agreement as a whole was unlawfully obtained.
So the 9th Circuit steered away from the question of whether the franchise agreement as a whole was unconscionable, and left that for the arbitrator.
As for the unconscionability of the arbitration clause, the court did decide that issue. The clause was on page 25 of a 30 page agreement and nobody told the franchisee it was there. But the franchisee was experienced in business and had ample opportunity to read the clause and consider its implications. Conclusion: the arbitration clause was valid.
Employees trying to escape from arbitration agreements can get the court to resolve unconscionability issues if they are dealing with a stand-alone arbitration agreement. If the agreement to arbitrate is embedded in a larger agreement (such as an employment agreement), then the employee needs to focus on the issue of whether the arbitration clause is unconscionable. They better argue and present proof on both, however, because if the arbitration clause is unlawful then the court will decide the whole case.
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A frolic of its own
March 20, 2005 by Ross Runkel at LawMemo
What to do with a federal Circuit Court that is grossly insubordinate to the will of Congress and instructions from the US Supreme Court?
The 5th Circuit in Continental Airlines v. Teamsters (5th Cir 11/15/2004) made it clear that it intends to continue to be a renegade - reciting the rules correctly and then refusing to apply them.
On March 14 the union filed a petition for a writ of certiorari asking the Supreme Court to bring the Circuit back into line.
Brief facts:
Employee Johnson was on a last chance agreement and an EAP agreement. The company discharged him because he tested positive for alcohol. The union grieved and the dispute went to an Adjustment Board - an arbitration board provided for by the Railway Labor Act. The agreements disallowed any use of alcohol, and required Johnson to notify the company "if your doctor prescribes medication that contains alcohol." Johnson took cough medicine on instructions from his doctor's staff, and notified the company. The Board held that he had complied with his agreements and ordered him reinstated.
The 5th Circuit's decision:
Because there was no evidence that Johnson ever saw his doctor or that the doctor's staff consulted with the doctor, "Johnson's doctor never approved the use of cough medicine." The Board's "interpretation is not an arguable construction of the agreements" because "the Board's interpretation effectively reads 'doctor' out of the EAP agreement."
What's really happening here:
Rebellion, pure and simple. The 5th Circuit (1) recited the correct standard of review, and then (2) reversed the Board on its findings of fact and (3) reversed the Board on its interpretation of the agreement.
The 5th Circuit is a recidivist.
Paperworkers v. Misco, 484 US 29 (1987), came from the 5th Circuit. There the Supreme Court chose the strongest possible words about court review of arbitrators' factfinding and contract interpretation. (1) There is no court remedy for an arbitrator's "improvident, even silly factfinding." (2) "The courts ... have no business weighing the merits of the grievance, considering whether there is equity in a particular claim, or determining whether there is particular language in the written instrument which will support the claim." [Quoting Steelworkers v. American Mfg, 363 US 564 (1960)]
What's at stake?
(1) The structure Congress created for resolving disputes in the rail and airline industries, and the arbitration systems in use in other industries. If the 5th Circuit continues substituting its own version of the facts and its own interpretation of agreements, then these systems will be wrecked. Cough syrup grievances will be resolved in the courthouse instead of by arbitrators - flouting the will of Congress and needlessly adding to judicial workloads. (2) The rule of law. The 5th Circuit's defiant approach of paying lip service to the rules and then refusing to follow them undermines the rule of law, the supremacy of Congress in law-making, and the supremacy of the Supreme Court in the federal judicial system. Yuck!
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Volt revisited, with a twist
March 20, 2005 by Ross Runkel at LawMemo
The Federal Arbitration Act (FAA) preempts state law that is contrary or frustrates the FAA's purposes. But parties can agree to state law arbitration rules and avoid FAA preemption. A simple matter of allowing folks to voluntarily opt out of the FAA. Volt Information Services v. Stanford University 489 US 468 (1989).
Cronus Investments v. Concierge Services (California 03/10/2005) put a twist on Volt.
The parties agreed to follow California law, and that the designation of California law "shall not be deemed an election to preclude application of the [FAA], if it would be applicable." A multi-party set of disputes arose, involving six agreements, some with and some without arbitration clauses. All this went to court, and the trial judge stayed the arbitrations pending resolution of the court litigation - as allowed by California Code of Civil Procedure 121.2 subdivision (c).
State law question - choice of laws
The California Supreme Court held that agreeing to use California law meant agreeing to use California's arbitration statutes.
Federal law question - preemption
(1) The court saw no actual conflict between the FAA and the California statute. This was based in large part on a finding that FAA Sections 3 and 4 (directing "courts of the United States" to stay court trials until arbitration has taken place, and directing "United States district court[s]" to order parties to proceed to arbitration) do not apply in state courts, and thus have no preemptive effect.
(2) The court saw no conflict with the spirit of the FAA, and said that the state law actually fosters the federal policy favoring arbitration. "It is an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties."
Significance of the case
I would not read much "law" into this case. It really means only that the parties are allowed to decide for themselves whether they want the procedural rules of the FAA or the procedural rules of the state statute to control.
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Court, not arbitrator, decides waiver issue
March 17, 2005 by Ross Runkel at LawMemo
Q: Is a claim that one party waived its right to arbitrate to be decided by a court or by an arbitrator?
A: Court.
Q: Is a claim that arbitration is barred by a contractual limitation period to be decided by a court or by an arbitrator?
A: Arbitrator.
In Marie v. Allied Home Mortgage Corp (1st Cir 03/16/2005), Marie sued under Title VII claiming sex discrimination, and the employer moved to compel arbitration. Conceding that the claims were arbitrable, Marie argued that (1) the employer waived its right to arbitrate by not filing for arbitration while the case was pending at the EEOC level, and (2) failed to comply with the 60-days filing period specified in the arbitration agreement.
Waiver of right to arbitrate
Who decides this issue? Court or arbitrator? It may well depend on what the conduct was that allegedly constituted the waiver. If the conduct was litigation-related and was within the same litigation in which one party attempts to compel arbitration, then the trial court has the power to control the course of proceedings before it. Also, there is the argument that judges are better able to "recognize abusive forum-shopping." Finally, there is the inefficiency argument: Let's not have the case bounce back-and-forth, as it would if the arbitrator did find there was a waiver. Bottom line here: the court should decide the waiver issue.
But wait. Let's read the arbitration agreement. It specifically said that the parties agreed to arbitrate "all disputes" regarding their agreement, "including the arbitrability of any such controversy or claim." The court interpreted the word "arbitrability" as having its focus on "substantive issues," which does not include waiver by conduct.
So the court interpreted the contract to decide that waiver was not for the arbitrator to decide, even though the contract provided that the arbitrator would interpret the contract. Go figure.
(On the merits of waiver, the court held - properly I believe - that the employer's failure to attempt to move the case to arbitration during the EEOC investigation was not a waiver of its right to compel arbitration, assuming a timely motion in the trial court.)
Contractual limitation period
In Howsam v. Dean Witter Reynolds, 537 US 79 (2002), the US Supreme Court dealt with a time limit provision contained in the arbitration rules the parties had agreed to. The Supreme Court held this to be an issue to be decided by the arbitrator rather than by the court. Here, it made no difference that the 60-filing period was included in the arbitration agreement. Same result. This is work for the arbitrator, not the court. This is what the Howsam Court called one of those "procedural questions which grow out of the dispute and bear on its final disposition."
That sounds right to me.
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Connecticut court supports arbitration
March 17, 2005 by Ross Runkel at LawMemo
Kirby's Reports kindly gave permission to quote this post. The reasoning and result are mainstream, and I'm surprised that the trial judge's reasoning was so far off the mark. "Irrelevant," according to the high court.
More support for arbitration from [Connecticut] Supreme CourtIn Board of Education v. Nonnewaug Teachers' Assn., SC17138 (Mar. 1, 2005), the Connecticut Supreme Court held that the proper distribution of the value of stock issued to the Board of Education (the “Board”) from the demutualization of Anthem Blue Cross and Blue Shield was an arbitrable grievance under the parties’ collective bargaining agreement. Here, the Nonnewaug Teachers’ Association (the “Association”) filed a grievance under Section V of the collective bargaining, which provided for the shares of health insurance costs paid for by the Board and the Associations’ members. When the Board denied the grievance, the Association filed for arbitration with the American Arbitration Association as called for in the arbitration clause of the agreement. The Board then filed an action in Superior Court seeking a judgment declaring that that the dispute was not arbitrable since the Board had not violated any provision in the agreement. The trial court subsequently held that the dispute was not subject to arbitration because “neither party could have anticipated” the unexpected distribution of stock and, accordingly, “the parties could not have agreed to arbitrate about it.” Id at 3. In a per curiam decision, the Supreme Court noted that the trial court’s analysis was “irrelevant” because “collective bargaining agreements typically contain provisions that are intended to have broad applicability irrespective of whether a particular occurrence specifically was contemplated by one or both of the parties.” Id. at 4 (internal quotation marks omitted). In rejecting the Board’s arguments, the court noted that the dispute in this case was indistinguishable from Board of Education v. Wallingford Education Assn., 271 Conn. 634, 635, 858 A.2d 762 (2004), an opinion that was issued after the subject appeal was filed, but before oral arguments were heard.
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How not to set up an arbitration system
March 09, 2005 by Ross Runkel at LawMemo
Ryan's Family Steak Houses set up an interesting three-party arbitration arrangement. (1) Potential employees signed an agreement with Employment Dispute Services, Inc. (EDSI), an arbitration service-provider, agreeing to use EDSI as an arbitration forum. In theory, Ryan's could enforce that contract as a third-party-beneficiary. (2) Ryan's and EDSI had a contract in which Ryan's agreed to use EDSI to resolve employee disputes. In theory, an employee could enforce that contract as a third-party-beneficiary.
The 6th Circuit found so many flaws in this deal that I cannot list them all. In Walker v. Ryan's (6th Cir 03/09/2005) employees sued claiming FLSA violations, and Ryan's moved to compel arbitration. Denied; denial affirmed.
Lack of consideration - no contract
EDSI provided no consideration to the employees because EDSI retained the right to modify its arbitration rules at any time. Ryan's provided no consideration because it was not obligated to submit its employment disputes to EDSI.
No knowing and voluntary waiver - no contract
Lots of facts on this point. Plaintiffs were poorly educated, in dire financial circumstances, were hired quickly with time to read the arbitration policy, possibly got misleading information from managers. Bottom line: No waiver of the right to go to court.
Lack of mutual assent - no contract
The arbitration language was on page 10 of an 11 page contract; it was a take-it-or-leave it deal in which the employee had no bargaining power; the employee was poorly educated; and the agreement was not adequately explained. Conclusion: no mutual assent.
Biased arbitration panel
The 6th Circuit found that the EDSI arbitration forum was not neutral, and that made the agreement unenforceable. EDSI is a for-profit company and Ryan's provided 42 percent of its gross income during one year. Said the court, "Ryan's effectively determines the ... pools of arbitrators." On top of that, EDSI had no protocol for selecting potential arbitrators out of its pools of arbitrators. Usually, arbitrator bias is a matter for post-arbitration litigation, but here the court felt that this system was "fundamentally unfair."
OK Ryan's. Maybe you should try using a real arbitration system.
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NASD rules preempt state ethics rules for arbitrators?
March 03, 2005 by Ross Runkel at LawMemo
The 9th Circuit says NASD rules preempt state ethics rules for arbitrators in employment disputes. The California Supreme Court hears arguments on a similar preemption issue on March 8, 2005.
The 9th Circuit case: Credit Suisse v. Grunwald (9th Cir 03/01/2005) [pdf]. Under Credit Suisse's Employment Dispute Resolution Program, Grunwald was obligated to use arbitration to resolve his employment dispute. He wanted arbitration conducted by the American Arbitration Association (AAA), but Credit Suisse preferred arbitration conducted by the National Association of Securities Dealers (NASD).
Why would it matter? California has a statute requiring neutral arbitrators to make extensive disclosures relating to potential conflicts of interest, and these would apply in an AAA arbitration. NASD rules also require disclosures but they are partly in conflict with the California rules.
The 9th Circuit held that the California rules are preempted and do not apply to NASD arbitrations.
The theory in brief: NASD is a private organization regulated by the Securities Exchange Commission (SEC). Acts of Congress can preempt state law and so can regulations of agencies such as the SEC. The arbitration rules adopted by the NASD were approved by the SEC, and therefore have preemptive force. Some California rules are preempted because they directly conflict with NASD rules; some are preempted because they would be an obstacle to executing Congress' purposes.
The California case: Jevne v. Superior Court, to be argued in the California Supreme Court March 8. Court of Appeal decision is Jevne v. Superior Court (California Court of Appeal 11/09/2003) [pdf]. This is not an employment case, but the court similarly held that the NASD arbitration rules preempted California's rules.
Interesting that the 9th Circuit decision is not binding on California courts. Although California is geographically within the 9th Circuit, it is a separate court system. So let's wait and see whether the cases come out the same. It could be that California doesn't think that the rules of a private organization (NASD) can preempt state law.
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Editor: Ross Runkel, Professor of Law Emeritus. email Ross@LawMemo.Com, Phone 503-399-8028. Copyright LawMemo, Inc.
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