As the Federal Arbitration Act (“FAA”)2 approaches the centennial of its 1925 enactment, court decisions analyzing its intent, scope, and application continue to flourish.
This survey highlights some of the more significant arbitration rulings issued by the United States Supreme Court and the federal courts of appeals since the last annual update.
As the Federal Arbitration Act (“FAA”) approaches the centennial of its 1925 enactment, court decisions analyzing its intent, scope, and application continue to flourish. This survey highlights some of the more significant arbitration rulings issued by the United States Supreme Court and the federal courts of appeals since the last annual update.
Last year, the Supreme Court issued five opinions concerning arbitration. This year, the Court issued only one opinion, but it is one that is of great practical importance to arbitration practitioners. In Coinbase, Inc. v. Bielski, the Court held that an appeal of the denial of a motion to compel arbitration pursuant to section 16(a) of the FAA automatically stays district court proceedings pending the outcome of the appeal. The decision resolves a split between the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits, which held that a district court may not proceed with litigation pending appeal, and the Second, Fifth, and Ninth Circuits, which held that a stay is not mandatory but rather subject to the lower court’s discretion.
In this case, investors who purchased and sold cryptocurrencies on Coinbase’s online trading platform filed a putative class action against the company in the Northern District of California alleging that it failed to replace funds fraudulently taken from the users’ accounts in violation of state consumer protection laws and federal regulations. Coinbase filed a motion to compel individual arbitration pursuant to an arbitration provision in the plaintiffs’ account agreements that the district court denied on the ground that the provision was unconscionable. Coinbase appealed the district court’s ruling to the Ninth Circuit pursuant to FAA section 16 and asked the district court to stay further proceedings pending appeal. The district court refused to issue a stay, emphasizing that under Ninth Circuit precedent, the denial of a motion to compel arbitration does not result in an automatic stay of proceedings pending appeal of that order and that a stay pending appeal is a matter of judicial discretion, not of right. The court found that the plaintiff would be prejudiced by a stay since “Coinbase is a large company,” while “[plaintiff] is a single individual” and “would suffer if forced to wait for a remedy.” Coinbase renewed its stay motion with the Ninth Circuit, which summarily denied a stay. The Supreme Court granted Coinbase’s petition for a writ of certiorari and reversed the Ninth Circuit.
Writing for the majority, Justice Kavanaugh ( joined by Chief Justice Roberts and Justices Alito, Gorsuch, and Barrett) concluded that the Court’s earlier decision in Griggs v. Provident Consumer Discount Co., which held that an appeal divests the district court of its control over those aspects of the case involved in the appeal, “resolves this case” because “‘it makes no sense for trial to go forward while the court of appeals cogitates on whether there should be one.’” Thus, “Griggs dictates that the district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing.” Indeed, “[a]bsent an automatic stay of district court proceedings, Congress’ decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.” The Court further emphasized:
If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost—even if the court of appeals later concluded that the case actually had belonged in arbitration all along. Absent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration. That potential for coercion is especially pronounced in class actions, where the possibility of colossal liability can lead to what Judge Friendly called “blackmail settlements.” … A right to interlocutory appeal of the arbitrability issue without an automatic stay of the district court proceedings is therefore like a lock without a key, a bat without a ball, a computer without a keyboard—in other words, not especially sensible.
Moreover, the Court explained, from the judiciary’s “institutional perspective,” allowing a case to proceed simultaneously in the district court and the court of appeals “creates the possibility that the district court will waste scarce judicial resources—which could be devoted to other pressing criminal or civil matters—on a dispute that will ultimately head to arbitration in any event.” Such a scenario represents the “‘worst possible outcome’ for parties and the courts: litigating a dispute in the district court only for the court of appeals to ‘reverse and order the dispute arbitrated.’ The Griggs rule avoids that detrimental result.”
Moreover, according to the Court, when Congress wants an interlocutory appeal to automatically stay the district court proceedings, it “need not say anything about a stay” because “the background Griggs principle already requires an automatic stay of district court proceedings that relate to any aspect of the case involved in the appeal.” By contrast, “when Congress wants to authorize an interlocutory appeal, but not to automatically stay district court proceedings pending that appeal, Congress typically says so.” The Court strongly suggested, however, that courts of appeal should “proceed with appropriate expedition” when considering appeals from the denial of a motion to compel arbitration.
Although the Court’s decision provides federal court practitioners with a uniform rule regarding the stay of district court proceedings pending a section 16(a) interlocutory appeal, its effect on state court practice is less certain. While the FAA is applicable in both federal and state courts and preempts state laws that are contrary to the FAA’s purpose and policy of enforcing written arbitration agreements, it is questionable whether state procedural rules are preempted. Section 16 of the FAA has been characterized as a procedural rule. Only time will tell whether or not state court judges will find the reasoning of Coinbase to be persuasive even if not binding.
For the FAA to apply, there must be a written “contract” to arbitrate between the parties. In Oberstein v. Live Nation Entertainment, Inc., the Ninth Circuit acknowledged that “[w]ith the rapid growth of the internet and e-commerce, courts have been required to apply . . . traditional contract principles to novel forms of agreement.” It concluded, nonetheless, that “‘elemental principles of contract formation apply with equal force to contracts formed online.’”
In Oberstein, the plaintiffs’ class action lawsuit alleged that the defendants engaged in anti-competitive practices which violated the antitrust laws. The defendants moved to compel individual arbitration of the named plaintiffs’ claims pursuant to the arbitration provision in their websites’ terms of use. Opposing the motion, the plaintiffs argued that due to the website design, they did not have constructive notice of the arbitration provision, so no agreement to arbitrate was formed.
Affirming the district court, which compelled arbitration and dismissed the court action, the Ninth Circuit held that the user interface provided sufficient notice of the terms to constructively bind the plaintiffs. With respect to online contracts, the court explained:
[A]n enforceable agreement may be found where “(1) the website provides reasonably conspicuous notice of the terms to which the consumer will be bound; and (2) the consumer takes some action, such as clicking a button or checking a box, that unambiguously manifests his or her assent to those terms.”
The Oberstein court further noted that courts typically characterize online terms as:
“clickwrap” agreements, in which a website presents users with specified contractual terms on a pop-up screen and users must check a box explicitly stating “I agree” in order to proceed [or] “browsewrap” agreements, in which a website offers terms that are disclosed only through a hyperlink and the user supposedly manifests assent to those terms simply by continuing to use the website.
Thus, while “[c]ourts routinely find clickwrap agreements enforceable,” they are more reluctant to enforce browsewrap agreements because “they often leave users ‘unaware that contractual terms were even offered, much less that continued use of the website will be deemed to manifest acceptance of those terms.’”
Although the defendants’ websites in this case did not contain a “clickwrap” feature, the Ninth Circuit held that a reasonable user would still be able to locate the terms of use. The court emphasized that at three separate points, “when creating an account, signing into an account and completing a purchase,” webpage users were presented with a confirmation button with text above informing them that by clicking on the button, “you agree to our Terms of Use.” The fact that the Terms of Use were accessed via hyperlink to a separate webpage did not transform them into a “browsewrap” interface. The phrase “Terms of Use” was in bright blue font and located directly next to the box users were required to click to confirm their agreement. “Crucially,” the Ninth Circuit emphasized, the bright blue color conspicuously distinguished the hyperlink from the surrounding text. In light of these design elements, the website provided sufficient constructive notice of the Terms of Use “as a matter of law.”
In Zirpoli v. Midland Funding, LLC, a divided panel of the Third Circuit held that an arbitrator, not the district court, must decide whether class action claims brought against Midland Funding LLC are subject to arbitration. The question in Zirpoli was whether a challenge to the legality of an assignment of a loan that is subject to an arbitration agreement challenges the formation of the arbitration agreement itself. The Third Circuit answered that question in the negative and ordered the district court to grant Midland Funding’s motion to compel arbitration.
Midland Funding, the assignee of a loan agreement between Zirpoli and the original lender, moved to compel arbitration after Zirpoli brought a class action against it alleging violations of the Pennsylvania Consumer Discount Company Act (“CDCA”). Zirpoli opposed the motion on the ground that the assignment of the loan was illegal and void under state law because Midland Funding did not have a CDCA license or approval from the Pennsylvania Secretary of Banking to purchase the loan. Therefore, Zirpoli argued, only the original lender, not its assignee Midland Funding, could enforce the arbitration clause in his loan agreement. The district court concluded that it was authorized to decide this question of arbitrability, and it denied arbitration on the ground that the assignment of the loan contract to Midland Funding was invalid.
On appeal, the Third Circuit, acknowledging that arbitrability issues can be “mind-bending,” proceeded to “figure out whether the parties should arbitrate the question of whether the parties agreed to arbitrate the dispute.” It first determined that Zirpoli had entered into a valid agreement to arbitrate claims he might have against the original lender and its future assignees, such as Midland Credit. The court emphasized that while Zirpoli had raised a question as to the validity of the assignment, there was no question as to the validity of the agreement itself. The court next found that there was clear and unmistakable evidence that the parties intended to delegate arbitrability issues to the arbitrator, since the arbitration agreement covered “the arbitrability of a Claim” relating to the loan agreement and “any defenses to the enforceability” of the agreement.
Zirpoli argued that his objection to the assignment of the loan agreement constituted a challenge to the arbitration agreement’s formation because no contract between Zirpoli and Midland Funding was ever made. The Third Circuit rejected that argument, explaining that: “[D]etermining whether Midland is a valid assignee goes directly to whether it can enforce arbitration as the agreement provides, not whether the agreement exists; it clearly does exist and Zirpoli does not argue to the contrary.” Moreover, citing the U.S. Supreme Court’s decisions in Buckeye Check Cashing, Inc. v. Cardegna and Rent-A-Center, West, Inc. v. Jackson, the Third Circuit reasoned that an otherwise valid delegation clause is enforceable even if the arbitration agreement in which it is contained is alleged to be invalid and unenforceable. In Zirpoli, “[a] plain reading of the text of the arbitration agreement” showed that the parties “clearly and unmistakably expressed an agreement to arbitrate the issue of arbitrability.” Zirpoli thus underscores that arbitration agreements must be drafted carefully and precisely in order to reflect the intent of the contracting parties on issues of arbitrability.
In Meeks v. Experian Information Services, Inc., a divided panel of the Ninth Circuit, reversing a district court decision, compelled arbitration after determining that one of the litigants, Experian, was a party to the arbitration provision, even though Experian was not a party to the broader agreement that contained the arbitration provision.
Meeks filed a putative class action against Experian asserting violations of the Fair Credit Reporting Act. She had entered into a contract for credit monitoring services provided by Experian Consumer Services (“ECS”), an affiliate of Experian, and that contract contained an arbitration provision that defined ECS to include affiliates, such as Experian. However, the definition of ECS for purposes of the broader contract that contained the arbitration provision did not include affiliates or name Experian.
The district court found that Experian did not have a right to compel arbitration because it was not a party to the broader agreement. The court rejected Experian’s argument, based upon Supreme Court precedent interpreting the FAA that holds that arbitration provisions are “severable” from the larger contracts that contain them, and that under the FAA, the arbitration provision was a standalone contract and thus its definition of ECS should control. The Ninth Circuit reversed, finding that the district court misinterpreted this Supreme Court precedent. Based on that precedent, the Ninth Circuit analyzed the parties to the arbitration provision as though it were a standalone contract, even though it was contained within a broader “Terms of Use Agreement,” and concluded that because the definition of ECS for purposes of the arbitration provision included its affiliates, Experian was considered a “party” to the arbitration provision with standing to enforce it.
The Second Circuit clarified the standard for vacating an arbitration award in Smarter Tools, Inc. v. Chongqing Seni Import & Export Trade Co. In that case, Smarter Tools moved to vacate an arbitrator’s $2.4 million award against it on the ground, inter alia, that the award was not “reasoned,” as required by the arbitration clause. The district court initially found that the award was not reasoned and remanded the matter to the arbitrator to clarify his findings. After the arbitrator issued a final amended award, Smarter Tools again moved to vacate, arguing that the district court should have vacated the original award rather than remanding it and that the amended award manifestly disregarded the law. The district court refused to vacate the award, and the Second Circuit affirmed.
The Second Circuit first examined whether the district court was authorized to remand the matter to the arbitrator for clarification. Under the “functus officio doctrine,” the court explained, “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parties, to re-determine those issues.” There are exceptions to this doctrine, but whether a court may remand for an arbitrator to produce a reasoned award was an “open question” in the Second Circuit. Siding with other circuit courts that have addressed the issue, the Second Circuit held that remand is a “permissible choice” since it “simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.” That result was also consistent with the FAA.
The Second Circuit next held that the amended award did not manifestly disregard the law. It emphasized that an “‘extremely deferential standard of review’” should be applied to the review of arbitral awards in order “‘[t]o encourage and support the use of arbitration by consenting parties.’” A litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a “heavy burden,” as awards are vacated on grounds of manifest disregard only in those “exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” Thus, an arbitration award manifestly disregards the law only if “‘(1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well-defined, explicit, and clearly applicable to the case.’” According to the court, “‘[o]only a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The Second Circuit held that the amended award more than satisfied the "barely colorable justification" standard.
In France v. Bernstein, the Third Circuit likewise recognized that it is “a steep climb to vacate an arbitration award” and that courts will disturb an arbitration award only in “‘exceedingly narrow circumstances.’” One of those circumstances is if the award was procured by fraud. A party alleging fraud “must make a three-part showing: first, that there was a fraud in the arbitration, which must be proven with clear and convincing evidence; second, that the fraud was not discoverable through reasonable diligence before or during the arbitration; and, third, that the fraud was materially related to an issue in the arbitration.” The evidence in this case established that France's non-production of responsive documents, as well as his false testimony at the arbitration hearing and his pre-hearing deposition amounted to fraud, and it vacated the arbitration award against Bernstein.
In NuVasive Inc. v. Absolute Medical LLC, the Eleventh Circuit held that the three-month time limit for challenging arbitration awards under the FAA is not jurisdictional and that district courts may apply the extraordinary remedy of equitable tolling when circumstances warrant. Under section 12 of the FAA, a motion to vacate, modify, or correct an award must be served within three months after the award is filed or delivered. In NuVasive, the motion to vacate was untimely because after the case had returned to the district court for litigation of non-arbitrable issues, discovery conducted after the three-month period had lapsed revealed that a deposition witness’s testimony was influenced by text messages received during the testimony. The district court held that these circumstances warranted the application of equitable tolling, and the Eleventh Circuit affirmed.
The Eleventh Circuit’s rationale was two-fold. First, the court considered the factors specified in Holland v. Florida for determining whether Congress intended for tolling not to apply to a given statute. The court concluded that the text of the limitations period in section 12 did not preclude equitable tolling. Second, the Eleventh Circuit rejected the argument that the three-month period in section 12 is jurisdictional, so as to preclude any equitable exceptions. The court relied on the Supreme Court’s holding in Boechler, P.C. v. Commissioner of Internal Revenue that the text of a statute must clearly mandate a jurisdictional reading, which section 12 does not. The Eleventh Circuit cautioned, however, that its opinion in NuVasive should not encourage litigants to seek equitable relief indiscriminately, as it is an extraordinary remedy that is available only where exceptional circumstances warrant.
In Morgan v. Sundance, Inc., the Supreme Court held that a party alleging that another party waived the right to arbitrate by litigating in court is not required to show that it was prejudiced by the other party’s conduct. The Court reversed the Eighth Circuit, which had required a showing of prejudice due to the federal policy favoring arbitration.
Applying Morgan in the context of class action litigation, the Ninth Circuit held in Hill v. Xerox Business Services, LLC that the defendant (“XBS”) waived its right to arbitrate the claims of the unnamed putative class members because it litigated the merits of those claims in court, along with the claims of the named plaintiff, who had not agreed to arbitrate. According to the court, because Morgan eliminated the prejudice requirement as an element from any arbitration waiver test, the test for waiver of the right to compel arbitration in the Ninth Circuit now consists of only two elements: (1) knowledge of an existing right to compel arbitration; and (2) intentional acts inconsistent with that existing right.
While acknowledging that the defendant could not formally compel arbitration of the putative class members’ claims until after a class was certified and the notice and opt out period expired, the Hill court found that that the first prong of the waiver test was satisfied because:
[W]aiver is a unilateral concept. A finding of waiver by XBS looks only to the acts of XBS, binds only XBS, does not reach out to affect the rights of as then-unnamed class members, and does not depend upon when the law requires or authorizes such a right to be asserted.
As for the second prong of the waiver test, the Ninth Circuit discerned from the litigation history that XBS sought extensive discovery in court concerning the absent class members and pursued a dispositive motion which, had it succeeded, “would have struck an arrow through the heart of all class members’ claims.” The court concluded that XBS waived the right to compel arbitration of the putative class claims because it made a “strategic choice to engage the judiciary for resolution of the class claims rather than to obtain a resolution from an arbitrator.”
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.
