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Agreements to Arbitrate Disputes

• n an Individual Basis: Lessons for

Class Action and Contracts Counsel

Drafting Strategies to Avoid or Defeat Challenges to Scope

• r Enforceability of Arbitration Agreements

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, OCTOBER 11, 2016

Archis A. Parasharami, Partner, Mayer Brown, Washington, D.C. Kevin S. Ranlett, Partner, Mayer Brown, Washington, D.C.

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Agreements to Arbitrate Disputes

• n an Individual Basis

Lessons for Class Action and Contracts Counsel

Archis A. Parasharami Kevin S. Ranlett 202-263-3328 202-263-3217 Co-editors, Class Defense (classdefenseblog.com) October 11, 2016

Overview

I. The Sound of Silence: Oxford Health Plans LLC v. Sutter II. Express Class Waivers: Concepcion and American Express Co. v. Italian Colors Restaurant III. Choice-of-Law Clauses: DIRECTV, Inc. v. Imburgia IV. Best Practices for Implementing a Consumer Arbitration Program V. Proposed Regulations Restricting Arbitration

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Reduced transaction costs Less adversarial than litigation

Advantages of Arbitration

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Fair, expeditious dispute resolution

Congressional Support for Arbitration

 Federal Arbitration Act (FAA) adopted in 1925 to reverse long-standing judicial hostility to arbitration.  Section 2 of the Act provides that arbitration agreements must be enforced, unless there is a generally applicable rule of state law that would authorize invalidating any contract.

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The Road to Oxford Health Plans LLC v. Sutter  Initially, few arbitration agreements addressed class proceedings because arbitration traditionally was bilateral.  Class arbitration was postulated in the 1980s, but remained a virtual unknown for years.  In the late 1990s and early 2000s, courts began to disagree about whether “silent” arbitration agreements permitted class proceedings.  In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the Court had granted review to decide whether the Federal Arbitration Act permits the imposition of class arbitration when the parties’ agreement is silent regarding class

• arbitration. But a plurality concluded that first the arbitrator

should decide whether the agreement there was in fact “silent.”

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Stolt-Nielsen S.A. v. AnimalFeeds International Corp.  In Stolt-Nielsen, the parties stipulated that the arbitration agreement was “silent,” thus eliminating the obstacle in Bazzle to reaching the question.  The Court held that the arbitrators had exceeded their powers in ordering class arbitration based on their own policy preferences rather than looking to applicable substantive law.  The Court then clarified that “a party cannot be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

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Oxford Health Plans LLC v. Sutter  Oxford Health Plans is the sequel to Stolt-Nielsen  Circuit split:

– Second Circuit (joined by Third Circuit): judicial review of arbitrator’s ruling that “silent” arbitration clause permits class arbitration is limited to determining whether the issue was properly presented to the arbitrator. Jock v. Sterling Jewelers Inc., 646 F.3d 114 (2d Cir. 2011). – Fifth Circuit: district court properly vacated award construing “silent” clause to permit class arbitration because arbitrator “exceeded his powers.” Reed v. Florida Metro. Univ., Inc., 681 F.3d 630 (5th Cir. 2012).

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Oxford Health Plans LLC v. Sutter

 Supreme Court affirms 9-0 (Kagan, J.).  Holding: Federal Arbitration Act bars court from vacating arbitral award authorizing class arbitration when (1) the arbitrator’s decision is based on an arguable effort to construe the contract and (2) the parties had agreed that the arbitrator should decide issue. If so, “[t]he arbitrator’s construction holds, however good, bad, or ugly.”  Court distinguished Stolt-Nielsen as involving manifest disregard of the contract.  Footnote 2: Oxford didn’t argue that class arbitration was a “gateway” question of arbitrability.  Alito concurrence: If we actually were reviewing the merits, “we would have little trouble” reversing.

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Oxford Health Plans LLC v. Sutter  Key Takeaways

– Companies should revise their arbitration clauses to make prohibitions of class arbitration express. – Court meant what it said in Hall Street. – Be careful what you wish for. Don’t submit issues of arbitrability, including questions about whether the arbitration provision permits class arbitration, unless you are prepared to accept the consequences.

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Post-Oxford Health Plans Controversy

 Who decides whether an arbitration agreement is silent on class arbitration? – A “gateway question” of “arbitrability” is presumptively for the court to decide. Howsam v. Dean Witter Reynolds, Inc. (2002). – Is the availability of class arbitration a “gateway question”? And what if the agreement incorporates arbitration rules that assign all issues to the arbitrator? – Courts have reached varying outcomes, depending upon the language

• f the agreement:
• For court: Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809 F.3d

746 (3d Cir. 2016), cert. denied (Oct. 3, 2016); Huffman v. Hilltop Cos., 747 F.3d 391 (6th Cir. 2014).

• For arbitrator: Robinson v. J&K Admin. Mgmt. Servs., Inc., 817 F.3d 193 (5th
• Cir. 2016) (relying on delegation clause).

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Enforceability of Agreements to Arbitrate

• n an Individual Basis:

Concepcion and American Express

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Concepcion and American Express  Many arbitration agreements expressly require arbitration on an individual basis.  AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), addressed the patchwork of state-law rules regarding the enforceability of such arbitration agreements.  Even before Concepcion, most states enforced these agreements if they otherwise were fair.  Courts in other states—led by California—held that these agreements either are unconscionable or violate public policy.

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AT&T Mobility LLC v. Concepcion

Supreme Court holds (5-4) that FAA preempts California's rule requiring class proceedings to be available in arbitration.  “[C]lass arbitration” is “not arbitration as envisioned by the FAA” and “lacks its benefits.”  “Requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  Rationale: States may not require use of procedures that are inconsistent with fundamental attributes of arbitration.

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AT&T Mobility LLC v. Concepcion  The majority rejected the dissent’s argument that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.”

– “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” – “Moreover, the claim here was most unlikely to go unresolved” because of the special features of the AT&T arbitration agreement: “Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action.”

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Post-Concepcion Arguments Against Arbitration and the Road to American Express v. Italian Colors Restaurant

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Most Arguments Against Enforceability Rejected

 Although a few courts have reached contrary decisions, most courts generally reject:

– The contention that arbitration clauses that do not contain all of the pro-consumer provisions of AT&T’s clause are outside the scope of Concepcion’s holding. – The argument by plaintiffs asserting state-law causes of action that they should be permitted to prove that their claims cannot be vindicated effectively in individualized arbitration.

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Potential California Exceptions to Arbitration

 Plaintiffs claim that Concepcion permits states to refuse to enforce arbitration agreements when state law authorizes representative relief.

– Representative actions under California’s Private Attorney General Act (PAGA) – Public injunctive relief under California’s Consumers Legal Remedies Act (CLRA) or Unfair Competition Law (UCL)

 Lower courts have reached conflicting conclusions.

– California Supreme Court and Ninth Circuit hold that PAGA claims can't be arbitrated on an individual basis. Iskanian v. CLS Transportation of Los Angeles (Cal.); Sakkhab v. Luxottica Retail N. Am., Inc. (9th Cir.). – The Ninth Circuit initially held that the FAA preempts California’s rule that claims for public injunctive relief are exempt from arbitration, but after granting en banc review, punted on the question (Kilgore v. KeyBank, N.A.). – Public injunction issue currently pending before California Supreme Court.

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“Effective Vindication” of Federal Rights Argument

 To distinguish Concepcion, plaintiffs looked for a federal-law rule against enforcement of class waivers.  Plaintiffs argued that, despite Concepcion, if they can prove that they are not able to vindicate their own rights under federal statutes without the use of the class-action device, then their arbitration agreements are unenforceable.  The Second Circuit adopted this view in In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012).

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“Effective Vindication” of Federal Rights Argument

 The Supreme Court granted review in American Express Co. v. Italian Colors Restaurant.  Issue: “whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.”

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American Express Co. v. Italian Colors Restaurant

 American Express’s merchant agreements require arbitration; that arbitration, the Second Circuit held, must take place on an individual basis.  Merchants file class action asserting federal antitrust claims, and oppose motion to compel arbitration with declaration asserting that the non- recoverable cost of expert testimony to prove an individual claim of up to $38K would be “at least several hundred thousand dollars, and might exceed $1 million.”  District court denies motion to compel arbitration, and Second Circuit affirms, concluding that arbitration agreement was unenforceable because merchants had proven that “they would incur prohibitive costs if compelled to arbitrate under the class action waiver.”

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American Express: Two Interesting Concessions by Plaintiffs

1. Individuals can vindicate their claims under an AT&T-type clause.

– Plaintiffs: The AT&T “agreement at issue in Concepcion * * * ensure[s] the effective vindication of federal rights in the arbitral forum, * * * mak[ing] any judicial resort to the effective-vindication doctrine unnecessary.” Indeed, plaintiffs say that they “stand ready” to pursue their antitrust claims under an arbitration agreement “such as the one employed by AT&T in Concepcion.” – United States: the “cost- and fee-shifting provisions and premiums” available under ATTM’s arbitration provision make “consumers better

• ff under their arbitration agreement than they would have been in

class litigation,” thus “obviating a potential objection to enforcement

• f the arbitration agreement.”

2. Individuals can vindicate their claims under Amex’s clause if permitted to share costs by jointly retaining a common legal team and expert witness.

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American Express: The Supreme Court’s Decision

 Supreme Court reverses 5-3. Majority decision by Scalia, joined by Roberts, Kennedy, Thomas, and Alito. Kagan writes dissent, joined by Ginsburg and Breyer. Sotomayor recused herself.  FAA requires enforcement of arbitration agreements “according to their terms,” even “for claims that allege a violation of a federal statute, unless the FAA’s mandate has been overridden by a contrary congressional command.”  Majority finds no such command here: – “[T]he antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” – “Nor does congressional approval of Rule 23 establish an entitlement to class proceedings for the vindication of statutory rights.” That would be inconsistent with the Rules Enabling Act.

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American Express: The Supreme Court’s Decision

 Majority rejects reliance on “judge made exception to FAA” allowing the invalidation of arbitration agreements that preclude “‘effective vindication’ of a federal statutory right.”  That exception was “dictum.”  In any event, it would apply only to a “prospective waiver” of the “right to pursue statutory violations.” – “That would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights.” – “And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.”  “But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

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American Express: The Supreme Court’s Decision

 Thomas concurrence: “I join the Court’s opinion in full.” In addition, would have reversed the ruling below as contrary to plain text of FAA, which in his view limits courts to contract-formation challenges.  Kagan, joined by Ginsburg and Breyer, dissents: – The “effective vindication” principle exists and applies here because individual arbitration would be prohibitively expensive. – The agreement forecloses other kinds of cost sharing. (But majority notes that Amex says that cost-sharing is permitted.) – Observes that the “effective-vindication rule comes into play only when the FAA is alleged to conflict with another federal law.” If plaintiff is suing under state law, “the Supremacy Clause requires its invalidation,” because “[w]e have no earthly interest (quite the contrary) in vindicating that law.”

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Key Takeaways from American Express

• 1. Court meant what it said in Concepcion: “Truth to tell, our

decision in AT&T Mobility all but resolves this case.”

• 2. Plaintiffs may oppose arbitration by relying on contract-

formation and scope arguments.

• 3. Plaintiffs also still can use the “effective vindication” rule in

certain circumstances in the federal context.

• 4. Plaintiffs still may invoke generally applicable

unconscionability principles to challenge unfair arbitration agreements, as Concepcion and subsequent cases make clear.

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Choice-of-Law Clauses and DIRECTV, Inc. v. Imburgia

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Choice-of-Law Clauses and the FAA

 Many contracts with arbitration clauses also contain choice-of- law clauses.  Does a generic choice-of-law clause selecting state law also call for application of that state's arbitration laws?

– Volt Info. Sciences v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989): FAA permits contract with California choice-of-law clause to direct application of California Arbitration Act permitting stay of arbitration, even if FAA would have barred a stay. – Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995): Best way to “harmonize” New York choice-of-law clause and arbitration provision is that choice-of-law clause “encompass[es] substantive principles” of New York law, without any “special rules limiting the authority of arbitrators.”

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DIRECTV, Inc. v. Imburgia

 DIRECTV's service agreement:

– "[A]ny claim either of us asserts will be resolved only by binding arbitration." – “Neither you nor we shall be entitled to join or consolidate claims in arbitration …, or arbitrate any claim as a representative member

• f a class or in a private attorney general capacity.”

– “If, however, the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire [arbitration provision] is unenforceable.” – Separate choice-of-law clause selected law of the state of the customer, except that the arbitration clause “shall be governed by the Federal Arbitration Act.”

 Does the reference to "the law of your state" mean preempted state law?

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DIRECTV, Inc. v. Imburgia

 Supreme Court upholds DIRECTV's arbitration clause by a 6-3 vote.  Majority (Breyer, J.) recognizes that the construction of the contract is a question of state law.  But in construing “law of your state” to select preempted state law, the California court so deviated from ordinary, generally- applicable California contract-law principles as to violate the FAA.

– Language isn’t ambiguous. – In other contexts, references to “law” mean only valid law. – State court’s interpretation was arbitration-specific.

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DIRECTV, Inc. v. Imburgia

 Two dissents:

1. Thomas, J.

• Dissented because “I remain of the view that” the FAA “does not apply

to proceedings in state court.”

2. Ginsburg, J., and Sotomayor, J.

• Supreme Court should defer to California court’s application of California

contract law to interpret the DIRECTV arbitration provision.

• Contends that ambiguous contracts should be read against the drafter.

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Implementing an Arbitration Program: Best Practices

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Implementing an Arbitration Program  More companies are implementing arbitration programs. Key drafting issues include:

– Ensuring creation of a contractual relationship – Consider whether to allocate issues of arbitrability to court or to arbitrator. – Class-action waivers should be express and non-severable. – Ensure arbitration procedures are fair to consumers – Select a reputable arbitration provider such as AAA and/or JAMS.

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Implementing an Arbitration Program

 Avoid provisions that could be held invalid under unconscionability principles – Marmet Health Care Center v. Brown, 132 S. Ct. 1201, 1204 (2012): – “Arbitration clauses may be “unenforceable under state common law principles that are not specific to arbitration and pre-empted by the FAA.” – Draft agreement to avoid these pitfalls:

• Selection of arbitral forum
• Allocation of arbitration costs, especially for small claims
• No limitation of remedies
• Place/mode of arbitration
• Equal treatment of both parties’ potential claims

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Implementing an Arbitration Program  Include consumer- and employee-friendly provisions

– Extra emphasis on arbitration clause: make it prominent – Option of small claims court – Consider possibility of allowing consumers/employees to opt

• ut of arbitration

 Assess appropriateness of premium approach

– Arbitration is not “one size fits all”; different structures are appropriate for different types of relationships. – Premium approach has benefit of providing an additional layer

• f protection.

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Key Features of AT&T’s Arbitration Clause from Concepcion

 Consumer pays no arbitration costs as long as the claim is not frivolous.  AT&T must pay the consumer a minimum of $5,000 (now, $10,000) plus double attorneys’ fees if the arbitrator awards the consumer more than AT&T’s final settlement offer.  Arbitrator may award any form of individual relief affecting the individual claimant alone (including punitive damages, attorneys’ fees, and injunctive relief) that would be available to the consumer in court.  Consumer may file suit in small claims court rather than arbitrating.  Arbitration takes place in the county in which the consumer resides, and for claims under $10,000, the consumer may choose whether the arbitration will be in person, by telephone, or on written submission.  Proceedings (including the process for selecting the arbitrator) are governed by consumer arbitration rules of the independent, non-profit American Arbitration Association.  Consumers and their attorneys are not required to keep arbitration confidential, and may bring issues to the attention of federal or state agencies.

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Regulation By Federal Agencies Could Restrict the Use of Arbitration

CHANGES AHEAD? CHANGES AHEAD?

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Consumer Financial Protection Bureau

 The Consumer Financial Protection Bureau has the power to regulate the use of arbitration by businesses subject to its jurisdiction: – Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act calls for the Bureau to study the use of pre-dispute arbitration agreements in consumer financial markets. – The Act then gives the Bureau the power to “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”

• Note that any rule must be based on the findings of the arbitration study.

Anti-Arbitration Regulation

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Consumer Financial Protection Bureau

 The Consumer Financial Protection Bureau has proposed a rule to ban invoking arbitration when a class action has been filed in court, unless class certification has already been denied. – Rule also requires reporting of information about arbitrations to CFPB. – Rule applies to contracts for certain consumer financial products and services, and to those companies’ affiliate service providers. – Effective date: 211 days after the date the final rule is published in the Federal Register.  Arbitration agreements that are entered into before the effective date will not be affected by the rule unless they are later modified  Rule is likely to face court challenges

Anti-Arbitration Regulation

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National Labor Relations Board

 D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 6, 2012) – Employee filed complaint with NLRB, arguing that arbitration provision is an unfair labor practice under Section 8 of National Labor Relations Act because it bars exercise of Section 7 right to engage in “concerted activity.” – A two-member panel of the Board concluded that because the NLRA protects “concerted activity,” it is an unfair labor practice to require arbitration on an individual basis as a condition of employment.  NLRB’s position rejected by the Second, Fifth, and Eighth Circuits. D.R. Horton, Inc.

• v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d

290 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013).  But the NLRB’s position was adopted by the Seventh and Ninth Circuits. Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir.), pet. for cert. filed 9/2/16; Morris v. Ernst & Young, 2016 WL 4433080 (9th Cir. Aug. 22, 2016), pet. for cert. filed 9/8/16.  NLRB has filed a cert petition in Murphy Oil (5th Cir.)

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Questions? Archis Parasharami – 202-263-3328 aparasharami@mayerbrown.com Kevin Ranlett – 202-263-3217 kranlett@mayerbrown.com Stay tuned: www.classdefenseblog.com Twitter: @classdefense

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