ADR Cases

Vol. 20 No. 1

Under FAA, Court Decides Whether Party Waived Arbitration

In Hong v. CJ CGV America Holdings, Inc., No. B246945 (Cal. Ct. App. Dec. 18, 2013), the court held that under the Federal Arbitration Act, the issue of whether a party waived arbitration by substantially participating in litigation is an issue for the court, not the arbitrator. In this shareholder derivative action, the defendants participated in discovery and other pretrial activities before moving to compel arbitration. The trial court denied the motion, holding that the defendant waived the right to arbitration by “substantially participating in the litigation.” On appeal the defendants claimed that under the FAA the arbitrator should decide the issue of waiver by participation. The court of appeals pointed to the overwhelming weight of federal and state courts that have addressed the issue and have held that waiver by litigation is generally an issue for the court, not the arbitrator, and in this case the arbitration clause did not specifically provide otherwise. To read more: http://www.courts.ca.gov/opinions/documents/B246945.PDF.

Non-appealability Clause in Arbitration Agreement that Eliminates All Federal Court Review of Arbitration Awards, Including FAA, Not Enforceable

In In re: Wal-Mart Wage and Hour Employment Practices Litigation, No. 11-17718 (9th Cir. Dec. 17, 2013), the Ninth Circuit held that parties to an arbitration agreement governed by the FAA cannot agree to narrow the scope of judicial review of arbitral awards. This case was a dispute among parties’ counsel who settled a case with Wal-Mart and had agreed they would arbitrate their entitlements to fees. Parties unhappy with the allocation of fees in the arbitration award petitioned the district court to vacate the award. The court denied the petition on the basis that the agreements provided for “binding, non-appealable arbitration.” On appeal, the Ninth Circuit reversed the district court and held that under the FAA Section 9, an order confirming the arbitration award is enforceable unless the award is vacated or modified under Section 10, which states factors for vacatur. Basing its decision on Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the court ruled that a party may not contract away or waive the right to judicial review of arbitration awards and that Section 10 grounds for vacatur are exclusive and may not be changed by agreement of the parties. To read more: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/12/17/11-17718.pdf.

Third Party is Only a Party When Sufficiently Identified

In Lee v. Intelius Inc., No. 11-35810 (9th Cir. Dec. 16, 2013), the Ninth Circuit affirmed the district court’s order denying a third-party defendant’s motion to compel arbitration. After the plaintiff purchased a background check on the Internet, the plaintiff discovered that a third party had been charging his credit card each month for a “Family Safety Report.” In a state-law class action suit, the plaintiff alleged improper charging of plaintiff’s credit card. The court held that the third party was not sufficiently identified as a contractual party during the initial transaction and since a contract must identify the parties to the contract, the plaintiff did not enter a contract with the third party. Additionally, the court reasoned that even if the plaintiff entered into a contract for a purchase where a third-party was not sufficiently identified, a consumer would have assumed that he was consenting to the initial party’s terms and conditions and not the third-party’s and would not be subject to the third-party’s arbitration clause. To read more: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/12/16/11-35810.pdf.

Bed Bugs and the FTC

In Seney v. Rent-a-Center, Inc., No. 13-1064 (4th Cir. Dec. 11, 2013), the Fourth Circuit held that the arbitration clause in the rental agreement for a parasite-infested bed is not covered by a Federal Trade Commission ban on “pre-dispute” arbitration. The court held that the FTC ban applied only to breach of warranty claims relating to the sale of goods, stating, “The FTC regulations limit suppliers’ ability to require binding arbitration of “written warranties” in sales agreements: they do not reach warranties included in leases.” To read more: http://www.ca4.uscourts.gov/Opinions/Published/131064.P.pdf.

Court, Not Arbitrator, Decides Validity of Arbitration Clause

In Smith v. JEM Group, Inc., No. 11-35964 (9th Cir. Dec. 12, 2013), the Ninth Circuit held that the question of arbitrability is for the court and not the arbitrator. The defendants argued that the lower court erred in denying a motion to compel arbitration and in deciding that the arbitration clause in an attorney retainer agreement was unconscionable. The Ninth Circuit relied on Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., which reads, “‘the question of arbitrability is for the court to decide regardless of whether the specific challenge to the arbitration clause is raised as a distinct claim in the complaint’ so long ‘as the plaintiff’s challenge to the validity of an arbitration clause is a distinct question from the validity of the contract as a whole’” in upholding the lower court decision. To read more: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/12/11/11-35964.pdf.

Matthew Conger is a staff attorney with the ABA Section of Dispute Resolution. He can be reached at matthew.conger@americanbar.org.

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