Arbitrable Claims Must Be Arbitrated, Even If Brought With Nonarbitrable Ones: Supreme Court

This posting was written by John W. Arden.

The Federal Arbitration Act (FAA) requires the arbitration of pendent arbitrable claims brought in a court action that includes nonarbitrable claims, even when the result would be the inefficient maintenance of separate proceedings in different forums, the U.S. Supreme Court held on November 7.

Thus, a Florida state court erred in refusing to compel arbitration of claims because two of the four claims brought in an action were nonarbitrable, including a claim brought under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).

Courts must examine a complaint with care to assess whether any individual claim must be arbitrated, the Supreme Court advised in a per curiam opinion.

Investment Losses

In this instance, 19 individuals and entities that purchased interests in one of three limited partnerships brought an action against the partnerships, an investment company, and an auditing firm after the partnerships lost millions of dollars investing with notorious financier Bernie Madoff.

Only the claims against the auditing firm (KPMG) were at issue in this case. The individuals alleged four causes of action: negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act, professional malpractice, and aiding and abetting a breach of fiduciary duty.

The individuals and entities alleged that KPMG failed to use proper auditing standards with respect to the financial statements of the partnerships, leading to “substantial misrepresentations” about the funds and resulting in investment losses.

Motion to Compel Arbitration

KPMG moved to compel arbitration based on a clause in its auditing service agreement with the partnerships and investment company. That clause stated that any dispute or claim involving any person or entity for whose benefit auditing services were provided was to be resolved by mediation or arbitration.

The Florida circuit court denied the motion to compel arbitration and the court of appeals affirmed the ruling, noting that none of the individuals or entities bringing suit expressly assented to the auditing agreement or the arbitration provision. The arbitration clause could be enforced only if the claims were derivative—that is, arising from the auditing performed under the auditing services agreement.

The appellate court held that the negligent misrepresentation claims and the FDUTPA claims were “direct” rather than derivative, and therefore were not abitrable. However, the court failed to address the abitrability of the remaining two claims—professional malpractice and aiding and abetting a breach of fiduciary duty.

Policy in Favor of Arbitration

According to the Supreme Court, the Federal Arbitration Act reflected an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi Motors Corp. v. Soler-Chrysler Plymouth, Inc., 473 U.S. 614 (1985), CCH Business Franchise Guide ¶8387. This policy requires courts to enforce the bargain of the parties to arbitrate.

“What is at issue is the Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them, the claim of negligent misrepresentation and the alleged violation of the FDUTPA, were nonarbitrable,” the court stated.

The Supreme Court has held that the FAA “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985).

When a complaint contains both arbtirable and nonarbitrable claims, the FAA requires a court to compel arbitration of the arbitrable claims, even when such a ruling would cause the inefficient maintenance of separate proceedings in different forums.

“To implement this holding, courts must examine a complaint with care to assess whether any individual claim must be arbitrable. The failure to do so is subject to immediate review.”

The judgment of the Florida appellate court was vacated and the case was remanded for examination of whether either of the remaining two claims required arbitration.

The decision is KPMG LLP v. Cocchi, No. 10-1521, November 7, 2011. Text of the opinion will appear in CCH Business Franchise Guide and CCH State Unfair Trade Practices Law.

Federal Courts Differ Over Arbitrability of California Consumer Claims

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Two federal district courts in California have reached opposite conclusions on the question of whether claims for injunctive relief under California false advertising and consumer protection statutes are subject to arbitration.

Nelson v. AT&T Mobility LLC

The federal district court in San Francisco held that the Federal Arbitration Act preempted California Supreme Court decisions barring arbitration of claims for injunctive relief under the state’s consumer statutes, in Nelson v. AT&T Mobility LLC, No. C10-4802 THE, (ND Cal. Aug. 18, 2011).

An AT&T wireless customer asserted class action claims under the California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) seeking injunctive relief to bar AT&T from continuing to engage in business practices including alleged overbilling by improperly calculating surcharges on monthly bills.

The court held that the U.S. Supreme Court’s April 27, 2011 decision in AT&T v. Concepcion (CCH Advertising Law Guide ¶64,265) compelled arbitration of Nelson’s claims.

Ferguson v. Corinthian Colleges

The federal district court in Santa Ana expressly declined to follow the Nelson decision in Ferguson v. Corinthian Colleges, Nos. SACV 11-0127 DOC (AJWx) and SACV 11-0259 (AJWx), (CD Cal. Oct. 6, 2011).

Students asserted class action claims under the UCL, CLRA, and the California False Advertising Law (FAL) alleging that Corinthian used fraudulent misrepresentations to entice prospective students to enroll. Through Corinthian’s various websites, the students claimed they were deceived about federal financial aid, the true cost of attending the programs, the value of Corinthian’s accreditations, and the employment prospects and career placement services that students could expect.

The court denied Corinthian’s Motion to Compel Individual Arbitration, holding that the statutory purpose of the injunctive relief provisions of the UCL, FAL, and CLRA and the public interest concerns in this case likely could not be met through arbitration. The court found no apparent conflict with the Federal Arbitration Act and noted that Concepcion did not take a position on the arbitrability of public injunction actions.

These conflicting decisions highlight the unresolved tension between state consumer protection law and the policies favoring arbitration of disputes embodied in the Federal Arbitration Act.

The opinions in Nelson v. AT&T Mobility LLC and Ferguson v. Corinthian Colleges will be reported in CCH Advertising Law Guide.

Federal Arbitration Act Preempts California Law of Contractual Unconscionability: Supreme Court

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a dispute over a consumer contract with an arbitration clause that included a class action waiver, the Federal Arbitration Act preempted a California rule of law that barred the waiver as unconscionable, the U.S. Supreme Court held today in a 5-4 decision.

The court reversed and remanded a decision of the U.S. Court of Appeals in San Francisco (CCH Advertising Law Guide ¶64,059) declining to compel individual arbitration of a consumer’s claim for $30.22 in a dispute over a wireless telephone service provider's practice of charging sales tax on cell phones advertised as “free.” The appeals court had held that the class action waiver in the wireless service agreement was unconscionable under the law of California.

In Discover Bank v. Superior Court, the California Supreme Court held that the doctrine of unconscionability barred the enforcement of class action waivers in arbitration clauses when the contracting party with superior bargaining power is alleged to have deliberately cheated large numbers of consumers out of individually small sums of money.

Federal Arbitration Act

Section 2 of the Federal Arbitration Act provides that a written contractual provision to arbitrate a controversy arising out of the contract is enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.”

While acknowledging that unconscionability is a generally applicable doctrine of contract law, Justice Scalia, writing for the majority, concluded that Section 2 of the Federal Arbitration Act preempted California’s Discover Bank rule.

Individual v. Class Arbitration

A switch from individual to class arbitration would make the process slower, more costly, less informal, and greatly increase the risks to defendants, according to the Court. When damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable, the Court announced.

The arbitration agreement provided that the wireless provider would pay claimants a minimum of $7,500, and twice their attorney’s fees, if they obtained an arbitration award greater than the provider’s last settlement offer, the Court added.

Dissent

Justice Breyer, in a dissent joined by Justices Ginsburg, Sotomayor, and Kagan, questioned whether a rational lawyer would have signed on to represent a client for the possibility of fees stemming from a $30.22 claim. The Federal Arbitration Act’s basic objective was to assure that courts treat arbitration agreements like all other contracts. Recognition of the federalist ideal, embodied in specific language in the statute, should lead the Court to uphold California’s law, not to strike it down, according to the dissent.

The April 27 decision in AT&T Mobility LLC v. Concepcion will be reported in CCH Advertising Law Guide.

High Court Hears Arguments on Class Arbitration in Price Fixing Case

This posting was written by John W. Arden.

The U.S. Supreme Court today heard arguments on whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court is reviewing a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355), holding that purchasers of shipping services could proceed with class arbitration of their price fixing claims against four major maritime shipping companies.

The federal appellate court held that class arbitration was permissible, even though arbitration clauses in the underlying maritime agreements did not specifically provide for it.

In their petition for certiorari, the maritime shipping companies argued that Supreme Court review was appropriate in light of a split among the circuits and because the case was free of threshold issues that previously thwarted review of the question.

The companies contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.” Stolt-Nielsen SA v. Animalfeeds International Corp., Docket No. 08-1198, cert. granted June 15, 2009.

Authority of Arbitrators

Arguing for the shipping companies, Seth P. Waxman pointed out that—unlike courts—arbitrators derive their authority “solely from the consent of the parties to a particular agreement.”

When an agreement reveals no intent to add participants, arbitrators who nevertheless extend the process to hundreds of parties to other contracts “violate the basic principle reflected in the FAA that their authority is created and circumscribed by an agreement,” according to Mr. Waxman.

In a discussion with Justice Breyer, the petitioners' lawyer stated that there were two questions before the Court (1) whether there was a meeting of the minds between the parties on the issue of class arbitration and (2) if there was no meeting of the minds, and the contract was truly silent, whether ordering class arbitration would be permissible under the FAA.

Mr. Waxman answered his own questions—that no meeting of the minds was objectively revealed and therefore the arbitrator exceeded his authority under the FAA in requiring class arbitration. There was no express provision one way or the other, and maritime law governing the contract looks to the custom and practice in the industry, which is to not allow class arbitration.

Contract Interpretation

Speaking on behalf of the purchasers of shipping services, Cornelia T.L. Pillard maintained that the arbitrators only did what they were asked to do—interpret the contract. “They did not impose their own policy judgment,” she said. They relied on the broad language of the agreement and on the fact that “many other arbitrators had read similar language to permit class arbitration.”

By agreeing to arbitrate “any disputes,” the parties gave the arbitrators the authority to use class arbitration, among other procedures, that was appropriate to a particular case, she said.

There was an extensive discussion—between Justice Scalia and Ms. Pillard—about whether the arbitrators in the case agreed to permit class arbitration or simply did not agree to prohibit it. Ms. Pillard maintained that once the arbitrators had “affirmative general authorization” to choose any appropriate procedures, the shippers would have had to show the parties’ intent to preclude class arbitration.

Chief Justice Roberts pointed out that there is a difference “between allowing something and a background rule that requires it if you don’t say anything about it.” Later, he summed up, “So we have to decide, when . . . the contract says nothing about class actions, whether the background rule should be you can go ahead—or the background rule should be, you can’t go ahead.”

Justice Ginsburg opined that if the purchasers win this case and obtain class arbitration, that the shippers would insert “express no-class-action terms” in all their future contracts.

Ms. Pillard agreed, but said “at least it was incumbent on them to do that here if this was something they were so concerned about. . . . “

The 71-page transcript of the oral argument appears here on the U.S. Supreme Court website.

New Jersey Consumer Class Claims to Proceed Despite Waiver in Arbitration Clause

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

A class-arbitration waiver agreed to by holders of the American Express “Blue Cash” credit card would be invalid against “low-value” claims asserted on behalf of New Jersey cardholders in a class complaint under the state’s Consumer Fraud Act, the U.S. Court of Appeals in Philadelphia has ruled.

American Express allegedly violated the Act by misrepresenting its cash rewards program in promoting the card and by failing to award the promised amounts of cash back.

Federal Arbitration Act

The waiver of class claims was contained in an arbitration clause in the “Blue Cash” cardmember agreement. The Federal Arbitration Act provides that written arbitration agreements are enforceable unless grounds exist for revocation of the contract. The U.S. Supreme Court has held that state law may be applied in order to resolve questions of enforceability.

Choice of Law

The cardmember agreement contained a Utah choice-of-law provision. A Utah statute expressly allowed class action waivers in consumer credit agreements.

The Utah statute conflicted with a fundamental policy of New Jersey, the court found. The New Jersey Supreme Court, in Muhammad v. County Bank of Rehoboth Beach, Del., 912 A.2d 88 (N.J. 2006), held unconscionable a class-arbitration waiver in a consumer contract between a customer and a bank that gave out “pay day loans.”

American Express contended that Utah law should be applied because the cards were issued by its bank subsidiary located in Utah. The court disagreed, finding that New Jersey had the most significant contacts with the litigation, as the only claims asserted were violations of the state’s Consumer Fraud Act.

The court decided that, under Muhammad, if the claims of individual cardholders are for small sums, both the Utah choice-of-law provision and the class-arbitration waiver are unenforceable. Dismissal of the class complaint was reversed, and the case was remanded for further proceedings.

The February 24, 2009, opinion in Homa v. American Express Co. will be reported in CCH Advertising Law Guide and CCH State Unfair Trade Practices Law.