In the early 1990s, BG Group PLC (BG), a British company, made a major investment in Argentina’s natural gas industry. Later, in the midst of an economic crisis, Argentina enacted an emergency law that required investors to collect tariff revenues in Argentinian pesos at a rate of one peso per dollar. Given the weak international peso-to-dollar exchange rate, these changes made it difficult for BG to see a return on its investment. Simultaneously, Argentina adopted legislation that stayed all lawsuits arising from these emergency measures. BG sought recourse under a bilateral investment treaty (Treaty) between the United Kingdom and Argentina. The Treaty required that BG first attempt to resolve its dispute before a “competent tribunal” in Argentina for at least eighteen months. Instead, BG bypassed the Argentinian courts and submitted its dispute directly to an arbitral tribunal. The arbitral panel, seated in Washington, D.C., held that Argentina’s changes to its judicial system excused the eighteen-month precondition to arbitration and awarded BG over $185 million in damages.
Argentina petitioned the district court to vacate the award under the Federal Arbitration Act by arguing that the arbitral panel exceeded its powers. The court denied the petition. In Republic of Argentina v. BG Group PLC, the U.S. Court of Appeals, District of Columbia Circuit reversed and held that, because of the litigation precondition to arbitration, the determination of whether BG could submit its dispute directly to arbitration must be made by a court, not the arbitral tribunal. BG appealed the D.C. Circuit’s decision and the Supreme Court of the United States granted certiorari.
Various individuals and organizations filed amicus briefs with the Supreme Court. One such organization was the AAA. The AAA sides with BG group and asks the Court to overturn the D.C. Circuit’s decision.
In its amicus brief, the AAA provided three arguments. Namely, the AAA argues: (1) the D.C. Circuit’s decision invites inefficiencies in the arbitral process through increased judicial intervention; (2) the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users; and (3) the D.C. Circuit’s decision puts the United States at odds with the international arbitration community and threatens its standing as a seat for international arbitration.
In my opinion, the argument that the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users is the most interesting argument advanced by the AAA.
In brief summation, the AAA argues that the parties in the instant case agreed to arbitrate under ICDR’s rules, and under ICDR’s rules, questions of arbitrability are to be determined by the arbitrators. The AAA argues that this conclusively establishes that all issues of arbitrability were to be determined by the arbitrators.
The AAA notes that the D.C. Circuit acknowledged this fact, but, nonetheless, held that the arbitrability of this particular dispute was to be decided by a court. As stated above, the D.C. Circuit reasoned that this was due to the fact that, as a precondition to arbitration, the parties were to first proceed in court. As such, the precondition expressed a clear and unmistakable intent for a court to determine issues of arbitrability in the first instance.
This is a tough issue. However, I have to agree with the D.C. Circuit’s interpretation of the parties’ arbitration agreement. Where a precondition to arbitration mandates first proceeding in a judicial forum, to allow one party to unilaterally bypass that agreed to precondition and have arbitrators determine whether such a bypass affects arbitrability would pervert the parties’ agreement. The D.C. Circuit’s interpretation appears to be the only interpretation that gives pre-perversion effect to the parties’ agreement.
What are your thoughts? Did the D.C. Circuit get it right?
Friday, November 22, 2013
Friday, November 15, 2013
And I thought it Couldn't Get Any Worse
After reading the Supreme Court’s decision in AT&T Mobility v. Concepcion, I found it hard to believe the Court could do a worse job. Boy was I wrong.
To briefly summarize American Express Co. v. Italian Colors Restaurant, several merchants, including Italian Colors Restaurant, brought individual lawsuits against American Express, claiming that the American Express’ Card Acceptance Agreement violated U.S. antitrust laws. The United States District Court for the Southern District of New York consolidated the cases and American Express moved to dismiss in order to force the merchants to arbitrate. The district court enforced the arbitration clause and dismissed the case. The merchants appealed and the United States Court of Appeals for the Second Circuit held that the arbitration clause, in particular the class action waiver, is unenforceable because it would essentially protect American Express from antitrust suits. American Express further appealed and the United States Supreme Court granted certiorari. The Court vacated the ruling and remanded for further proceedings in light of its decision in Stolt-Nielsen v. Animalfeeds International. The appellate court reevaluated its decision and still found the class action waiver to be unenforceable. The Supreme Court granted certiorari again to resolve this issue.
The Court held that the prohibitively high cost of arbitration is not a sufficient reason for a court to overrule an arbitration clause that forbids class action suits. The Court reasoned that federal law does not guarantee that a claim will be resolved affordably. In fact, the fact that it can be more expensive to litigate individual arbitrations than they are worth does not negate the right to pursue a statutory remedy. Therefore, no exception to the Federal Arbitration Act (FAA) can be applied.
After reading American Express Co. v. Italian Colors Restaurant, I refused to believe that a state court would decline to comment on the Court’s holding. After shepardizing American Express Co. v. Italian Colors Restaurant, I was able to locate a case from the Massachusettes Supreme Judicial Court that criticizes the Court’s holding. An excerpt from that case is provided below.
In Feeney II, supra, we were asked to interpret and apply Concepcion, which held that the FAA preempted a California rule that "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable" because it stood "as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]" to ensure the enforcement of agreements to arbitrate according to their terms. Id. at 1746, 1753. Our holding in Feeney II derived, at least in part, from our belief that Concepcion, while severely constraining the grounds on which a court could invalidate a class waiver in an arbitration agreement as unconscionable or against public policy, permitted the invalidation of a class waiver where that waiver "operate[s] in practice to deny a willing plaintiff any and all practical means of pursuing a claim against a defendant." Feeney II, supra at 491. After all, we observed, Concepcion went "to great length to demonstrate the overall fairness of [the parties' arbitration agreement] and the Court's belief that a consumer could successfully pursue a remedy under the regime it established." Feeney II, supra at 495, citing Concepcion, supra at 1753.
In Amex, the Supreme Court explicitly rejected our reading of Concepcion. As we observed in Feeney II (based on an earlier decision of the United States Court of Appeals for the Second Circuit in the Amex case), apart from the fact the plaintiffs in Amex asserted Federal statutory rights, the one critical difference between Amex and Concepcion was that the plaintiffs in Amex had actually demonstrated that "the cost of . . . individually arbitrating their dispute with Amex would be prohibitive, effectively depriving [them] of the statutory protections of the antitrust laws." Feeney II, supra at 500, quoting In re Am. Express Merchants' Litig., 634 F.3d 187, 197-198 (2d Cir. 2011), aff'd en banc, 667 F.3d 204 (2d Cir. 2012), rev'd sub nom. Amex, supra. Yet when Amex reached the Supreme Court, the Court remarked: "Truth to tell, our decision in [Concepcion] all but resolves this case. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" Amex, supra at 2312, quoting Concepcion, supra at 1753. The Court went on to state that Concepcion "established . . . that the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims." Amex, supra at 2312 n.5. "Accordingly, the FAA . . . favor[s] the absence of litigation when that is the consequence of a class-action waiver, since its 'principal purpose' is the enforcement of arbitration agreements according to their terms." Id., quoting Concepcion, supra at 1748.
Rejecting the Amex plaintiffs' argument that the class action waiver in question must be invalidated because, when combined with other terms of the arbitration agreement, it required an individual plaintiff to spend "between several hundred thousand and one million dollars" to recover at most, $38,000 in damages, id. at 2316 (Kagan, J., dissenting), the Court stated that "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy" (emphases in original). Id. at 2311. In doing so, the Court essentially held that as long as an arbitration agreement does not expressly "forbid[] the assertion of certain [Federal] statutory rights" or "perhaps" require the payment of "filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable," a plaintiff is not deprived of his or her right to pursue statutory remedies. Id. at 2310-2311.5 The Court went so far as to characterize as "dictum" its statement in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985), that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function."6 Amex, supra at 2310. The Court thus made clear that its discussion in Concepcion of the likelihood that those plaintiffs' claims could be resolved in individual arbitration did not contribute to its holding in that case, and in doing so, thwarted our reliance in Feeney II on that discussion.
Ultimately, in Amex, the Supreme Court makes clear both that Concepcion is not entitled to the reading we afforded it in Feeney II and that the analysis the Court set forth in Concepcion (and reinforced in Amex) applies without regard to whether the claim sought to be vindicated arises under Federal or State law. See Amex, supra at 2312 & n.5. Although we regard as untenable the Supreme Court's view that "the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims," id. at 2312 n.5, we are bound to accept that view as a controlling statement of Federal law.
As the foregoing excerpt proclaims, it is indeed a shame that the Court ruled that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of law-value claims.” Maybe it’s time to call your Congressman.
Which side do you support? Do you think the Supreme Judicial Court of Massachusetts’ reading of Concepcion was fair?
Sources:
AT&T Mobility v. Concepcion
30 Hofstra Lab. & Emp. L.J. 355, 383
Feeney v. Dell Inc.
To briefly summarize American Express Co. v. Italian Colors Restaurant, several merchants, including Italian Colors Restaurant, brought individual lawsuits against American Express, claiming that the American Express’ Card Acceptance Agreement violated U.S. antitrust laws. The United States District Court for the Southern District of New York consolidated the cases and American Express moved to dismiss in order to force the merchants to arbitrate. The district court enforced the arbitration clause and dismissed the case. The merchants appealed and the United States Court of Appeals for the Second Circuit held that the arbitration clause, in particular the class action waiver, is unenforceable because it would essentially protect American Express from antitrust suits. American Express further appealed and the United States Supreme Court granted certiorari. The Court vacated the ruling and remanded for further proceedings in light of its decision in Stolt-Nielsen v. Animalfeeds International. The appellate court reevaluated its decision and still found the class action waiver to be unenforceable. The Supreme Court granted certiorari again to resolve this issue.
The Court held that the prohibitively high cost of arbitration is not a sufficient reason for a court to overrule an arbitration clause that forbids class action suits. The Court reasoned that federal law does not guarantee that a claim will be resolved affordably. In fact, the fact that it can be more expensive to litigate individual arbitrations than they are worth does not negate the right to pursue a statutory remedy. Therefore, no exception to the Federal Arbitration Act (FAA) can be applied.
After reading American Express Co. v. Italian Colors Restaurant, I refused to believe that a state court would decline to comment on the Court’s holding. After shepardizing American Express Co. v. Italian Colors Restaurant, I was able to locate a case from the Massachusettes Supreme Judicial Court that criticizes the Court’s holding. An excerpt from that case is provided below.
In Feeney II, supra, we were asked to interpret and apply Concepcion, which held that the FAA preempted a California rule that "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable" because it stood "as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]" to ensure the enforcement of agreements to arbitrate according to their terms. Id. at 1746, 1753. Our holding in Feeney II derived, at least in part, from our belief that Concepcion, while severely constraining the grounds on which a court could invalidate a class waiver in an arbitration agreement as unconscionable or against public policy, permitted the invalidation of a class waiver where that waiver "operate[s] in practice to deny a willing plaintiff any and all practical means of pursuing a claim against a defendant." Feeney II, supra at 491. After all, we observed, Concepcion went "to great length to demonstrate the overall fairness of [the parties' arbitration agreement] and the Court's belief that a consumer could successfully pursue a remedy under the regime it established." Feeney II, supra at 495, citing Concepcion, supra at 1753.
In Amex, the Supreme Court explicitly rejected our reading of Concepcion. As we observed in Feeney II (based on an earlier decision of the United States Court of Appeals for the Second Circuit in the Amex case), apart from the fact the plaintiffs in Amex asserted Federal statutory rights, the one critical difference between Amex and Concepcion was that the plaintiffs in Amex had actually demonstrated that "the cost of . . . individually arbitrating their dispute with Amex would be prohibitive, effectively depriving [them] of the statutory protections of the antitrust laws." Feeney II, supra at 500, quoting In re Am. Express Merchants' Litig., 634 F.3d 187, 197-198 (2d Cir. 2011), aff'd en banc, 667 F.3d 204 (2d Cir. 2012), rev'd sub nom. Amex, supra. Yet when Amex reached the Supreme Court, the Court remarked: "Truth to tell, our decision in [Concepcion] all but resolves this case. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" Amex, supra at 2312, quoting Concepcion, supra at 1753. The Court went on to state that Concepcion "established . . . that the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims." Amex, supra at 2312 n.5. "Accordingly, the FAA . . . favor[s] the absence of litigation when that is the consequence of a class-action waiver, since its 'principal purpose' is the enforcement of arbitration agreements according to their terms." Id., quoting Concepcion, supra at 1748.
Rejecting the Amex plaintiffs' argument that the class action waiver in question must be invalidated because, when combined with other terms of the arbitration agreement, it required an individual plaintiff to spend "between several hundred thousand and one million dollars" to recover at most, $38,000 in damages, id. at 2316 (Kagan, J., dissenting), the Court stated that "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy" (emphases in original). Id. at 2311. In doing so, the Court essentially held that as long as an arbitration agreement does not expressly "forbid[] the assertion of certain [Federal] statutory rights" or "perhaps" require the payment of "filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable," a plaintiff is not deprived of his or her right to pursue statutory remedies. Id. at 2310-2311.5 The Court went so far as to characterize as "dictum" its statement in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985), that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function."6 Amex, supra at 2310. The Court thus made clear that its discussion in Concepcion of the likelihood that those plaintiffs' claims could be resolved in individual arbitration did not contribute to its holding in that case, and in doing so, thwarted our reliance in Feeney II on that discussion.
Ultimately, in Amex, the Supreme Court makes clear both that Concepcion is not entitled to the reading we afforded it in Feeney II and that the analysis the Court set forth in Concepcion (and reinforced in Amex) applies without regard to whether the claim sought to be vindicated arises under Federal or State law. See Amex, supra at 2312 & n.5. Although we regard as untenable the Supreme Court's view that "the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims," id. at 2312 n.5, we are bound to accept that view as a controlling statement of Federal law.
As the foregoing excerpt proclaims, it is indeed a shame that the Court ruled that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of law-value claims.” Maybe it’s time to call your Congressman.
Which side do you support? Do you think the Supreme Judicial Court of Massachusetts’ reading of Concepcion was fair?
Sources:
AT&T Mobility v. Concepcion
30 Hofstra Lab. & Emp. L.J. 355, 383
Feeney v. Dell Inc.
Friday, November 8, 2013
Concepcion: Who Got it Right?
The main thrust of AT& T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) is that when state law prohibits the arbitration of a particular type of claim, the conflicting state law is preempted and displaced by the FAA.
In AT&T, Vincent and Liza Concepcion (the “Concepcions”) purchased cell phones from AT&T Mobility LCC (“AT&T”)and the contract of adhesion that they Concepcions signed provided for arbitration of all disputes between the parties. A&T had advertised that the phones were free, but nonetheless charged the Concepcions $ 30.22 in taxes. The Concepcions' suit was consolidated with similar claims in a class action suit filed in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on cell phones it advertised were free.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions---the terms of the contract disallowed class arbitration. However, both the federal district court and the Ninth Circuit refused to grant AT&T’s motion to compel. Both courts reasoned that the arbitration provision at issue was unconscionable under California's Discover Bank rule, which provided that class-action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money.
However, in the end, as stated above, the Court held that the Federal Arbitration Act of 1925 preempted state laws that prohibited contracts from disallowing class-wide arbitration, such as the Discover Bank rule. As its main pillar of reasoning, the Court portrayed the central policy of the FAA as enforcing arbitration agreements as they are written. As such, the FAA preempted any state law or policy, whether announced by legislatures or courts, that aimed specifically to limit the enforceability of arbitration agreements, or "that derive[ed] their meaning from the fact that an agreement to arbitrate is at issue." Such "discriminatory" laws and policies, or so the Court stated, were not the kinds of grounds "at law or in equity for the revocation of any contract" that were permissible defenses to arbitration agreements under § 2 of the FAA. California's Discover Bank rule, the Court concluded, operated to bar or limit arbitration provisions in a discrete manner, as opposed to putting arbitration agreements "on the exact same footing" as other species of contract. And consequently, the Discover Bank rule was preempted by the FAA.
The dissenting opinion found no grounds for FAA preemption of California law that described grounds for refusing to enforce "class action waivers." According to the dissent, the California Court's interpretation of general statutory requirements as making certain class-action waivers in consumer contracts exculpatory and unconscionable under California law represented "application of a more general [unconscionability] principle" to specific circumstances. Because the rule "applie[d] equally to class action litigation waivers in contracts without arbitration agreements as it d[id] to class arbitration waivers in contracts with such agreements," it put arbitration agreements on the same footing with some other contracts and "[could not] fairly be characterized as a targeted attack on arbitration."
As one article noted:
The lynchpin of Scalia's rationale is that under the FAA neither unconscionability nor any state law regulating exculpatory contract provisions can operate in a way that relies "on the uniqueness of an agreement to arbitrate." Yet the suggestion that the Discover Bank rule is discriminatory in its operation in the context of arbitration provisions is belied by the fact that in deciding Discover Bank, the California Court relied heavily on America Online, Inc. v. Superior Court, a decision denying enforcement to a contractual waiver of class action in a consumer contract without an arbitration clause. The case involved a subscription agreement that included Virginia forum-selection and choice-of-law clauses. However, because Virginia does not permit consumer class actions, the court reasoned that the provisions were the "functional equivalent of a contractual waiver" of the right to bring a class action. The court concluded that the effective denial of class-wide remedies would "substantially diminish the rights of California residents" and denied enforcement to the "waiver," thereby paving the way for a class-action suit in court. Analogous decisions involving nonarbitration contexts have been reached by a number of courts, and Discover Bank has itself been relied upon as a precedent in decisions striking down class-action waivers in contracts without arbitration clauses. As the Washington Supreme Court explained, in circumstances such as these, "[t]he arbitration clause is irrelevant to the unconscionability"; exculpatory clauses "do not change their character merely because they are found within a clause labeled 'Arbitration.'"
As far as the diverging opinions concerning whether the Discover Bank rule discriminated against arbitration are concerned, I have to agree with the dissent’s opinion. Just because the application of a rule has been primarily argued and applied in one context, it does not follow that the rule discriminates against that particular context. At best, arbitration was discriminated against through practice, not by the rule itself. Perhaps this was enough for the majority.
Who do you agree with on this point? The majority or the dissent?
In AT&T, Vincent and Liza Concepcion (the “Concepcions”) purchased cell phones from AT&T Mobility LCC (“AT&T”)and the contract of adhesion that they Concepcions signed provided for arbitration of all disputes between the parties. A&T had advertised that the phones were free, but nonetheless charged the Concepcions $ 30.22 in taxes. The Concepcions' suit was consolidated with similar claims in a class action suit filed in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on cell phones it advertised were free.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions---the terms of the contract disallowed class arbitration. However, both the federal district court and the Ninth Circuit refused to grant AT&T’s motion to compel. Both courts reasoned that the arbitration provision at issue was unconscionable under California's Discover Bank rule, which provided that class-action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money.
However, in the end, as stated above, the Court held that the Federal Arbitration Act of 1925 preempted state laws that prohibited contracts from disallowing class-wide arbitration, such as the Discover Bank rule. As its main pillar of reasoning, the Court portrayed the central policy of the FAA as enforcing arbitration agreements as they are written. As such, the FAA preempted any state law or policy, whether announced by legislatures or courts, that aimed specifically to limit the enforceability of arbitration agreements, or "that derive[ed] their meaning from the fact that an agreement to arbitrate is at issue." Such "discriminatory" laws and policies, or so the Court stated, were not the kinds of grounds "at law or in equity for the revocation of any contract" that were permissible defenses to arbitration agreements under § 2 of the FAA. California's Discover Bank rule, the Court concluded, operated to bar or limit arbitration provisions in a discrete manner, as opposed to putting arbitration agreements "on the exact same footing" as other species of contract. And consequently, the Discover Bank rule was preempted by the FAA.
The dissenting opinion found no grounds for FAA preemption of California law that described grounds for refusing to enforce "class action waivers." According to the dissent, the California Court's interpretation of general statutory requirements as making certain class-action waivers in consumer contracts exculpatory and unconscionable under California law represented "application of a more general [unconscionability] principle" to specific circumstances. Because the rule "applie[d] equally to class action litigation waivers in contracts without arbitration agreements as it d[id] to class arbitration waivers in contracts with such agreements," it put arbitration agreements on the same footing with some other contracts and "[could not] fairly be characterized as a targeted attack on arbitration."
As one article noted:
The lynchpin of Scalia's rationale is that under the FAA neither unconscionability nor any state law regulating exculpatory contract provisions can operate in a way that relies "on the uniqueness of an agreement to arbitrate." Yet the suggestion that the Discover Bank rule is discriminatory in its operation in the context of arbitration provisions is belied by the fact that in deciding Discover Bank, the California Court relied heavily on America Online, Inc. v. Superior Court, a decision denying enforcement to a contractual waiver of class action in a consumer contract without an arbitration clause. The case involved a subscription agreement that included Virginia forum-selection and choice-of-law clauses. However, because Virginia does not permit consumer class actions, the court reasoned that the provisions were the "functional equivalent of a contractual waiver" of the right to bring a class action. The court concluded that the effective denial of class-wide remedies would "substantially diminish the rights of California residents" and denied enforcement to the "waiver," thereby paving the way for a class-action suit in court. Analogous decisions involving nonarbitration contexts have been reached by a number of courts, and Discover Bank has itself been relied upon as a precedent in decisions striking down class-action waivers in contracts without arbitration clauses. As the Washington Supreme Court explained, in circumstances such as these, "[t]he arbitration clause is irrelevant to the unconscionability"; exculpatory clauses "do not change their character merely because they are found within a clause labeled 'Arbitration.'"
As far as the diverging opinions concerning whether the Discover Bank rule discriminated against arbitration are concerned, I have to agree with the dissent’s opinion. Just because the application of a rule has been primarily argued and applied in one context, it does not follow that the rule discriminates against that particular context. At best, arbitration was discriminated against through practice, not by the rule itself. Perhaps this was enough for the majority.
Who do you agree with on this point? The majority or the dissent?
Friday, November 1, 2013
Engalla and Revisiting the Doctrine of Separability
This week’s reading discussed “Judicial Policing of Arbitration Agreements in Consumer and Employment Contracts”. More specifically, this week’s reading discussed various ways in which courts have dealt with “unfair” arbitration agreements.
The week’s reading began with Engalla v. Permanente Medical Group, Inc. In Engalla, an employee, Engalla, brought a medical malpractice suit. The suit was submitted to arbitration, pursuant to the employee’s policy. “Engalla died before an arbitral hearing could be held. After his death, his family initiated a medical malpractice action in superior court.” Defendant HMO, Kaiser, brought a petition to compel arbitration.
Plaintiffs claimed that defendant HMO's self-administered arbitration system was unfair---the system was allegedly biased, and defendant HMO allegedly engaged in a course of dilatory conduct to postpone the employee's arbitration hearing until after his death. The trial court found for plaintiffs. The appellate court reversed. Plaintiffs appealed.
The Supreme Court of California reversed and remanded, finding that there was evidence to support the trial court's initial findings that defendant HMO engaged in fraudulent conduct justifying a denial of its petition to compel arbitration. The court did not find, however, that defendant HMO's arbitration program was unconscionable upon its face where it did not lack minimum levels of integrity.
This decision suggests that, while the courts will not circumvent arbitration agreements, the fairness of the arbitration process will be subject to court review. David Rand, attorney for the plaintiff in the suit against Kaiser, stated that the ruling "sends a clear message that plans can't manipulate arbitration to protect their interests."
After reading Engalla, I took a moment to reflect on prior reading assignments.
Throughout the course of the semester, we have discussed the doctrine of separability in great detail. As we have discussed, an agreement to arbitrate is "separate" or "separable" from the underlying contract, such that a contract is essentially viewed as containing two separate agreements, the agreement to arbitrate and the underlying contract. As such, the invalidity of the underlying contract does not necessarily invalidate an agreement to arbitrate and does not deprive an arbitrator of authority to decide on the validity of the underlying contract.
We first encountered the doctrine of separability in Prima Paint v. Flood & Conklin Mfg. Co. In Prima Paint, SCOTUS held that questions as to the validity of an underlying contract are for an arbitrator to decide and courts are confined to only determine challenges to an arbitration clause itself.
Later, in Buckeye Check Cashing v. Cardegna, SCOTUS reaffirmed Prima Paint's holding and held that a challenge to the validity of an underlying contract is for an arbitrator to decide, not only where a contract is claimed to be voidable, but also where it is claimed to be void.
Engalla provides a good example of arguing against the validity of an arbitration clause itself (for reasons other than the arbitrability of certain claims and public policy rationale). In Engalla, the Supreme Court of California held that since the challenge was to the arbitration agreement itself, the matter was for the court to decide not the arbitrator.
Do you agree with the doctrine of separability? Do you agree with the fact that arbitration agreements are enforceable in an otherwise void contract?
Sources: the Book; 18 Am. Rev. Int'l Arb. 455; 29 J.L. Med. & Ethics 203
The week’s reading began with Engalla v. Permanente Medical Group, Inc. In Engalla, an employee, Engalla, brought a medical malpractice suit. The suit was submitted to arbitration, pursuant to the employee’s policy. “Engalla died before an arbitral hearing could be held. After his death, his family initiated a medical malpractice action in superior court.” Defendant HMO, Kaiser, brought a petition to compel arbitration.
Plaintiffs claimed that defendant HMO's self-administered arbitration system was unfair---the system was allegedly biased, and defendant HMO allegedly engaged in a course of dilatory conduct to postpone the employee's arbitration hearing until after his death. The trial court found for plaintiffs. The appellate court reversed. Plaintiffs appealed.
The Supreme Court of California reversed and remanded, finding that there was evidence to support the trial court's initial findings that defendant HMO engaged in fraudulent conduct justifying a denial of its petition to compel arbitration. The court did not find, however, that defendant HMO's arbitration program was unconscionable upon its face where it did not lack minimum levels of integrity.
This decision suggests that, while the courts will not circumvent arbitration agreements, the fairness of the arbitration process will be subject to court review. David Rand, attorney for the plaintiff in the suit against Kaiser, stated that the ruling "sends a clear message that plans can't manipulate arbitration to protect their interests."
After reading Engalla, I took a moment to reflect on prior reading assignments.
Throughout the course of the semester, we have discussed the doctrine of separability in great detail. As we have discussed, an agreement to arbitrate is "separate" or "separable" from the underlying contract, such that a contract is essentially viewed as containing two separate agreements, the agreement to arbitrate and the underlying contract. As such, the invalidity of the underlying contract does not necessarily invalidate an agreement to arbitrate and does not deprive an arbitrator of authority to decide on the validity of the underlying contract.
We first encountered the doctrine of separability in Prima Paint v. Flood & Conklin Mfg. Co. In Prima Paint, SCOTUS held that questions as to the validity of an underlying contract are for an arbitrator to decide and courts are confined to only determine challenges to an arbitration clause itself.
Later, in Buckeye Check Cashing v. Cardegna, SCOTUS reaffirmed Prima Paint's holding and held that a challenge to the validity of an underlying contract is for an arbitrator to decide, not only where a contract is claimed to be voidable, but also where it is claimed to be void.
Engalla provides a good example of arguing against the validity of an arbitration clause itself (for reasons other than the arbitrability of certain claims and public policy rationale). In Engalla, the Supreme Court of California held that since the challenge was to the arbitration agreement itself, the matter was for the court to decide not the arbitrator.
Do you agree with the doctrine of separability? Do you agree with the fact that arbitration agreements are enforceable in an otherwise void contract?
Sources: the Book; 18 Am. Rev. Int'l Arb. 455; 29 J.L. Med. & Ethics 203
Subscribe to:
Posts (Atom)