January 04, 2017 Practice Points

Order Compelling Arbitration Properly Vacated When Arbitral Forum Unavailable

By Christopher S. Moore

In Moss v. First Premier Bank, 835 F.3d 260 (2d Cir. 2016), the United States Court of Appeals for the Second Circuit affirmed the district court's decision to vacate an order compelling arbitration after the arbitral body chosen by the parties in their arbitration agreement refused to accept the arbitration.

In Moss, the plaintiff had taken out three payday loans from an online payday lender. When the plaintiff applied for the loans, she electronically signed an application containing an arbitration clause. The clause provided, among other things:

You and we agree that … any claim arising from or relating to your application for this loan, regarding this loan or any other loan you previously or may later obtain from us … shall be resolved by binding individual (and not joint) arbitration by and under the Code of Procedure of the National Arbitration Forum ("NAF") in effect at the time the claim is filed....

835 F.3d at 262–63. The plaintiff filed a putative class action against two defendant institutions involved in the loans the plaintiff had received. The plaintiff alleged that the defendants had committed RICO and state-law violations in connection with her loans. The defendants moved to compel arbitration.

After the district court granted the defendants' motion to compel arbitration, the plaintiff advised the NAF that she intended to arbitrate her claims. The NAF responded that it was unable to accept the dispute pursuant to a consent judgment that it had entered into with the Minnesota Attorney General. The plaintiff thus moved to vacate the order compelling arbitration, arguing that the plaintiff could not arbitrate the claims because the NAF declined to arbitrate her case.

The district court vacated its earlier decision compelling arbitration. It concluded that the language of the clause reflected the parties' "intent to arbitrate exclusively before NAF" and that, under the Second Circuit's decision in In re Salomon Inc. Shareholders' Derivative Litig., 68 F.3d 554 (2d Cir. 1995), it was prohibited from appointing a substitute arbitrator. The defendants appealed. The Second Circuit affirmed.

Under Salomon, the Second Circuit noted, a district court cannot appoint a substitute arbitrator and compel arbitration in another forum when the parties have contractually agreed that onlyone arbitrator could arbitrate their dispute. Because the clause contained "numerous indicators that the parties contemplated" arbitration before the NAF (and nowhere else), the Second Circuit held that Salomon applied, and so the district court had correctly vacated its earlier decision compelling arbitration.

In reaching its decision, the Second Circuit addressed the defendants' argument that the "NAF's inability to accept" the case constituted a "lapse" in naming an arbitrator such that the district court could have and should have designated a different arbitrator under Section 5 of the Federal Arbitration Act. The Second Circuit rejected defendants' argument. It held:

Under Salomon, the dispositive factor is not why the designated arbitral forum is unavailable, but rather whether the designated forum was "exclusive." Where the forum is exclusive, the district court may not "use [Section] 5 to circumvent the parties' designation of an exclusive arbitral forum."

835 F.3d at 266. The Second Circuit also recognized a split of authority in the circuit courts on this issue, but stated it was "bound by Salomon."

Practice Point
Moss serves as a reminder that arbitration clauses should explicitly address whether the parties' choice of arbitral body is exclusive, or whether the parties wish instead to allow the appointment of a substitute arbitral body if the chosen body cannot or will not serve. Absent explicit language, parties run the risk that a court will refuse to compel arbitration if the chosen body cannot serve or refuses to serve.

Keywords: alternative dispute resolution, adr, litigation, Salomon, lapse, exclusive body, exclusive forum, unavailable, substitute arbitrator, FAA Section 5

Christopher S. Moore is a partner at Novack and Macey LLP, Chicago, Illinois.

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