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The Business Lawyer

Spring 2022 | Volume 77, Issue 2

A Steady Stream of Arbitration Decisions Despite Court Closures

Alan S Kaplinsky, Mark Jay Levin, and Martin Christopher Bryce Jr


  • Although most courts operated remotely last year, arbitration decisions continued unabated. The U.S. Supreme Court granted certiorari in two new cases, but declined to decide another case that it had previously agreed to review.
A Steady Stream of Arbitration Decisions Despite Court Closures
iStock/Sean Pavone

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Although most courts operated remotely last year, arbitration decisions continued unabated. The U.S. Supreme Court granted certiorari in two new cases, but declined to decide another case that it had previously agreed to review. The U.S. courts of appeals were also active, focusing in particular on the question of whether an “agreement” to arbitrate was formed.

U.S. Supreme Court Activity

In March 2021, the Court granted certiorari in Servotronics, Inc. v. Rolls-Royce PLC to decide whether 28 U.S.C. § 1782 grants parties to private international arbitrations situated outside the United States the right to seek discovery through U.S. district courts. Section 1782 permits an applicant to petition the federal courts to order document disclosure or compel testimony “for use in a proceeding in a foreign or international tribunal.” However, section 1782 does not define the phrase “foreign or international tribunal,” and the circuit courts have split on whether that phrase encompasses private foreign arbitrations. Servotronics itself involved disparate rulings on this issue by the Fourth and Seventh Circuits arising out of the same litigation. Although the case was scheduled for argument, it was dismissed when the parties filed a joint stipulation of dismissal. This leaves hanging, potentially for future resolution by the Supreme Court in another case, the circuit split on whether federal district courts are authorized to order discovery for use in private international arbitrations.

The Supreme Court also granted certiorari in Badgerow v. Walters to decide “[w]hether federal courts have subject matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the [FAA] where the only basis for jurisdiction is that the underlying dispute involved a federal question.” In Badgerow, an arbitration panel issued an award against the claimant, who filed a motion in state court to vacate the award. The respondents removed the case to federal court and moved to confirm the award. Denying the claimant’s motion to remand, the district court held that it had federal jurisdiction under the “look through” approach utilized by the Supreme Court when it construed section 4 of the FAA in Vaden v. Discover Bank. The district court confirmed the arbitration award, and the Fifth Circuit affirmed.

The Badgerow court held that because the FAA does not itself confer federal jurisdiction, a party who wishes to move to compel arbitration in federal court under section 4 of the FAA must allege an independent basis for federal jurisdiction. Vaden held that a federal court may “look through” a section 4 petition to determine whether it is predicated on an action that arises under federal law. However, the text of section 4 differs from the text of sections 9 and 10 of the FAA, and the circuit courts have split over whether the “look-through” approach applicable to a motion to compel arbitration under section 4 of the FAA also applies to a motion to confirm or vacate an arbitration award under sections 9 and 10 of the FAA. The First, Second, Fourth, and Fifth Circuits have all concluded, consistent with Vaden, that the federal courts may look through the motion to confirm or vacate to the parties’ underlying dispute when assessing the existence of federal question jurisdiction. The Third and Seventh Circuits have taken the contrary position. The Supreme Court’s decision in Badgerow should resolve that conflict. A decision is expected by June 2022.

In January 2021, the Supreme Court dismissed as improvidently granted a case it had previously agreed to review. In Henry Schein, Inc. v. Archer & White Sales, Inc., the Court held that the FAA requires courts to enforce clauses in arbitration agreements that delegate arbitrability issues to the arbitrator to resolve even if the arbitrability claim appears to be “wholly groundless.” It remanded the case to the Fifth Circuit to decide whether the parties, in fact, had intended such a delegation. The Court had agreed to review the Fifth Circuit’s conclusion, on remand, that the parties had not clearly and unmistakably delegated the question of arbitrability to an arbitrator. Given the Supreme Court’s dismissal, the Fifth Circuit’s opinion will stand.

Activity in the U.S. Circuit Courts

Several decisions in federal circuit courts of appeals focused on the critical threshold issue of whether an arbitration “agreement” exists. Under the FAA, the existence of a written arbitration agreement is a mandatory requirement for prosecuting a motion to compel arbitration. In Sevier County Schools Federal Credit Union v. Branch Banking & Trust Co., the plaintiffs opened money market accounts with the defendant’s predecessor that guaranteed that the rate of interest would never fall below 6.5 percent. The original account agreements did not contain arbitration clauses but did contain change-in-terms provisions providing that changes-in-terms “may be made by the financial institution from time to time.” After a series of mergers, the defendant came to hold the accounts and claimed that it sent the plaintiffs Bank Services Agreements (“BSA”) providing that by continuing to maintain their accounts, the plaintiffs agreed to the terms of the BSA which included an arbitration clause. After the defendant lowered the interest rate on the accounts, the plaintiffs sued and the defendant moved to compel arbitration under the BSA as amended. The district court granted that motion but the Sixth Circuit reversed in a two-to-one decision. The Sixth Circuit majority found that the defendant’s “discretion under the original change-of-terms provision to amend the terms is not unlimited, but is subject to two requirements: (1) that any changes be reasonable, and (2) that [the defendant] exercise its discretion to make such changes in a manner consistent with the implied covenant of good faith and fair dealing.” In so holding, the majority predicted that the Tennessee Supreme Court would follow Badie v. Bank of America, in which the California Court of Appeal held that a change-in-terms provision did not give the bank the right to unilaterally add an arbitration provision to the account holder’s original agreement. The majority primarily based its conclusion on the defendant’s failure to provide any right to opt-out of arbitration, which “left the Plaintiffs with no choice other than to acquiesce to the new arbitration provision or to close their high-yield savings accounts. And closing their accounts is a totally unreasonable option because doing so would obviate the very essence of the Plaintiffs’ accounts—the promise of a perpetual 6.5% annual interest rate.” The dissenting opinion in Sevier County concluded that the plaintiffs had agreed to the BSA and its arbitration provision by continuing to maintain their accounts with the defendant. The majority rejected that conclusion because of the defendant’s own inaction for sixteen-and-a-half years, during which the defendant “continued to honor the 6.5% interest-rate guarantee. The Plaintiffs were thus lulled into not giving a thought to the unilateral addition of the arbitration provision in the BSA.”

The Fourth and Ninth Circuits also addressed whether an arbitration “agreement” exists and reached two different conclusions after examining the same arbitration agreement under identical circumstances. In both cases, the plaintiffs’ AT&T Mobility accounts were governed by a customer agreement that contained an arbitration clause. Thereafter, AT&T, Inc., the parent company of AT&T Mobility, acquired DIRECTV. When the plaintiffs each brought putative class actions against DIRECTV, it invoked the arbitration clause in AT&T Mobility’s customer agreement which expressly defined AT&T Mobility to include its “affiliates.” The district courts in both cases denied DIRECTV’s motion to compel arbitration. However, in the Mey case, the Fourth Circuit reversed the district court, while in the Revitch case the Ninth Circuit affirmed. Both were two to one decisions.

In Mey, the Fourth Circuit rested its decision on the “plain language” of the arbitration agreement. The court rejected the plaintiff ’s argument that the term “affiliate” should be limited to affiliates of AT&T Mobility existing at the time she entered into the arbitration agreement. The majority explained that the plaintiff identified nothing in the arbitration agreement to support her construction, while the contractual context suggested the opposite as it “explicitly applies to ‘successors’ and ‘assigns,’ terms that by definition refer to parties whose identities cannot be known until some point in the future.” The majority further noted that the “arbitration agreement also includes other forward-looking provisions: it applies for the duration of the customer’s wireless service and even ‘survive[s] termination of this [Wireless Customer] Agreement’; it also specifically covers ‘claims that may arise after the termination of this Agreement.’”

However, the dissenting opinion in Mey concluded that a “reasonable person would have no reason to understand ‘affiliate’ as referring to any entity under common ownership with AT&T Mobility, at any time and for any reason. Instead, she quite reasonably would assume that this term covered entities related to AT&T Mobility by virtue of their participation, in some way, in the provision of service under the contract she was signing.” Accordingly, the dissenting opinion concluded: “What makes it clear that DIRECTV is not an ‘affiliate’ under the plain meaning of the contract is both that it had no relation to AT&T Mobility at that time, and that its future relationship to AT&T Mobility has absolutely nothing to do with the provision of services under the contract. For those reasons, a reasonable person would not anticipate arbitrating with DIRECTV, whose later affiliation with AT&T Mobility occurred by happenstance.”

The Ninth Circuit reached a different result, largely following the reasoning of the dissenting opinion in Mey. The Ninth Circuit rejected the argument that because DIRECTV and AT&T Mobility were under common ownership at the time suit was filed they were “affiliates” as that term was used in the arbitration agreement. The majority explained that under applicable California law “[w]e normally determine the mutual intention of the parties ‘from the written terms [of the contract] alone,’ so long as the ‘contract language is clear and explicit and does not lead to absurd results.’” Applying the “absurd-results canon,” the majority explained that under the defendant’s reading, “Revitch would be forced to arbitrate any dispute with any corporate entity that happens to be acquired by AT&T, Inc., even if neither the entity nor the dispute has anything to do with providing wireless services to Revitch—and even if the entity becomes an affiliate years or even decades in the future.” The majority concluded that “when Revitch signed his wireless services agreement with AT&T Mobility so that he could obtain cell phone services, he could not reasonably have expected that he would be forced to arbitrate an unrelated dispute with DIRECTV, a satellite television provider that would not become affiliated with AT&T until years later.” The majority also rejected DIRECTV’s argument that the FAA preempted California’s absurd-results canon under Lamps Plus, Inc. v. Varela. The majority distinguished Lamps Plus, explaining:

The problem with contra proferentem, according to the Supreme Court, is that it is a “default rule” that is “triggered only after a court determines that it cannot discern the intent of the parties.” The rule is distinguishable from other “contract rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties.” By contrast, we use the absurd-results canon to discern the mutual intent of the parties based on their reasonable expectations at the time of contract.

The dissenting opinion in Revitch followed the same approach as the majority opinion in Mey, concluding that: “Nothing in the arbitration clause or in the dictionary definition of the word ‘affiliate’ confers any type of temporal scope to the term so that ‘affiliates’ should be read to refer only to present affiliates. DIRECTV is therefore an affiliate within the explicit language of the arbitration clause.”

In another contract formation decision, Stover v. Experian Holdings, Inc., the Ninth Circuit dealt with an issue of first impression: whether a single visit to a website four years after assenting to a contract containing a change-in-terms provision bound the parties to terms in the then-current version of the contract of which the plaintiff was unaware. The Ninth Circuit concluded it did not.

In Stover, the plaintiff purchased an Experian credit score subscription by visiting Experian’s website in 2014, at which time she assented to its terms and conditions. The 2014 terms contained an arbitration clause requiring the arbitration of all claims arising out of the transaction ‘“to the fullest extent permitted by law’” as well as a change-of-terms provision stating that ‘“[e]ach time’” Stover ‘“accessed . . . the . . . Product Website,’” she would be manifesting assent to ‘“the then current’” terms of the agreement. She canceled her subscription that same year and did not access the Experian website again until the day before she filed her complaint in 2018. In 2018, the arbitration clause in the terms had changed to carve-out disputes arising out of or relating to the Fair Credit Reporting Act or similar federal and state laws. Experian moved to compel arbitration and the plaintiff opposed the motion, invoking the carve-out contained in the 2018 terms. The district court granted the motion, finding that the 2018 terms applied and that the claims asserted were not within the carve-out.

The Ninth Circuit affirmed but concluded that the 2014 terms applied. The court first noted that in Douglas v. United States District Court for the Central District of California, it had held that changed terms were unenforceable due to lack of notice because even if the plaintiff had visited the website where the new contract was posted, ‘“he would have had no reason to look at the contract posted there,” because “[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.’” The Ninth Circuit concluded that the existence of a change-in-terms provision in the 2014 terms was not enough to change the result here:

Although the 2014 terms contained a change-of-terms provision, nothing in Douglas suggests that mere inquiry notice of changed terms is enough to bind the parties to them. Stover assented only once to the terms of a single contract that Experian later modified without providing notice. Just as in Douglas, Stover had no obligation to investigate whether Experian issued new terms without providing notice to her that it had done so. Indeed, the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms.

The views expressed in this survey are those of the authors and are not intended to represent the views of their firm or their clients.