ADR Cases

Vol. 20 No. 4

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Effective Vindication Doctrine Does Not Invalidate Class Arbitration Waiver When Cost of Proving Claim Exceeds Potential Recovery

In American Express Co., v. Italian Colors Restaurant, 570 U.S. ___ (2013), the Supreme Court held that the Federal Arbitration Act does not permit courts to invalidate a class arbitration waiver because the cost of individually arbitrating a claim exceeds the potential recovery. The Court explained that the effective vindication doctrine prevents waiver of a party’s right to pursue a statutory remedy, but the fact that it’s not economical to prove a statutory remedy does not “constitute the elimination of the right to pursue that remedy.” 

Arbitrator Did Not Exceed Powers by Interpreting Arbitration Agreement to Permit Class Arbitration

In Oxford Health Plans, LLC v. Sutter, 569 U.S. ___ (2013), the Supreme Court unanimously held that an arbitrator did not exceed his powers in determining that class arbitration was permitted by the party’s contract. The Court distinguished Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) by explaining that in this case the arbitrator did his job and interpreted the contract, whereas in Stolt-Nielsen the arbitrators abandoned their interpretive role. The Court went on to say “that convincing a court of an arbitrator’s error – even his grave error – is not enough … the courts have no business overruling him because their interpretation of the contract is different from his.” Thus, because the arbitrator arguably interpreted the contract, courts may not correct his mistakes. To read more: http://www.supremecourt.gov/opinions/12pdf/12-135_e1p3.pdf.

Narrow ‘Public Injunction’ Exception to Federal Arbitration Act Does Not Apply When Violations Have Ceased and Affected Class is Relatively Small

In Kilgore v. Keybank Nat’l Ass’n, No. 10-15934 (9th Cir. 2013), the Ninth Circuit held that a narrow “public injunction” exception to the Federal Arbitration Act did not apply. Under the Broughton-Cruz rule, which the Ninth Circuit assumes is still valid after Concepcion, an otherwise valid arbitration agreement will not be enforced when plaintiffs are seeking injunctive relief that benefits the general public rather than the party bringing the action. In Kilgore, the exception does not apply because the beneficiaries of an injunction are a small class of former students and the flight school they attended had already shut down. Thus, because the alleged statutory violations had already ceased and the class affected is small, the public injunction exception does not apply. To read more: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/04/11/09-16703.pdf.

One Defendant May Not Compel Arbitration in Case with Multiple Defendants Because of Risk of Inconsistent Rulings

In Barsegian v. Kessler & Kessler, 215 Cal. App. 4th 446 (Cal. Ct. App. 2013), the California Court of Appeals upheld a trial court’s denial of a motion to compel arbitration on the grounds that arbitration between two, and not all, of the parties could create inconsistent rulings. The Court of Appeals rejected the argument alleging that all defendants were the same person or agents of each other because doing so would create the precedent that “as long as one defendant had entered into an arbitration agreement with the plaintiff, every defendant would be able to compel arbitration, regardless of how tenuous or nonexistent the connections among the defendants might actually be.” To read more: http://www.courts.ca.gov/opinions/documents/B237044.pdf.

Arbitration Clause in Preprinted Sales Contract Containing Automatic Appeals and Given to Consumers on Take-It-or-Leave-It Basis is Procedurally and Substantively Unconscionable

In Vargas v. Sai Monrovia B, Inc., ___ Cal. Rptr. 3d. ____, 2013 WL 2419044 (Cal. Ct. App. 2013), the California Court of Appeals reversed a trial court’s order compelling arbitration on the grounds that the arbitration clause was invalid because it was so permeated with unconscionability. The court held that the contract was procedurally unconscionable because the arbitration clause was located on the back of a large form with small print and given to the customer on a “take-it-or-leave-it” basis. Moreover, the arbitration clause was substantively unconscionable because it contained multiple unconscionable clauses: it allowed for an appeal of an arbitral award in excess of $100,000 or in cases of injunctive relief to a panel of three arbitrators; it stated that the appealing party must prepay all filing fees and arbitration costs; and it exempted the self-help method of repossession from arbitration. To read more: http://www.courts.ca.gov/opinions/documents/B237257.pdf.

Court Must First Determine Who is to Decide Whether Dispute is Arbitrable

In VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., No. 12–593–cv, 2013 WL 2372286 (2d Cir. 2013), the Second Circuit vacated and remanded the district court’s decision  and declined to enforce the foreign arbitration award because it determined that the claim did not fall within the scope of the arbitration agreement. The court clarified that the question of “who is to decide whether a dispute is arbitrable” must be answered before the question of “whether a dispute is arbitrable.”  This decision is for the district court unless the parties “clearly and unmistakably assign such questions to arbitration.” The Second Circuit found that the district court did not consider whether the agreement between the parties clearly indicated that an arbitrator or a court was to decide the question. To read more: http://www.ca2.uscourts.gov/decisions/isysquery/4f8e5b26-c395-4a63-9c88-a29030470430/10/doc/12-593_opn.pdf.

J.D. Hoyle is a law clerk with the ABA Section of Dispute Resolution. Kristen A. Erthum is a rising 3L at George Mason University School of Law.

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