California Legislature Opens Door to Out of State Lawyers in Arbitration

California Governor Jerry Brown signed into law Senate Bill 766, which allows out of state lawyers to represent parties in commercial arbitrations located in California. The previous restriction on out of state lawyers stemmed from the California Supreme Court decision in Birbrower, Montalbano, Condo & Frank v. Superior Court of Santa Clara County, 17 Cal. 4th 119 (1998). As I pointed out in a past post, the extra burden imposed by that decision may have led some parties to draft arbitration clauses to steer arbitration away from California. 

Dixon Dern, a California attorney, arbitrator, and mediator, offers a more detailed discussion of the bill and its requirements.

Arbitration Clauses in Corporate Charters to Prevent Investor Class Actions?

The Securities and Exchange Commission, as I noted a few months ago, is considering whether to start allowing arbitration clauses in corporate charters, so investor-company disputes would go to individual arbitration rather than class-action litigation.

Opposing this reform is Secure Our Savings (SOS), which recently submitted a letter to SEC Chairman Jay Clayton. SOS wants the Chair "to reaffirm the SEC’s longstanding position that forced

arbitration provisions that prevent investors from bringing or participating in class actions

violate Section 29(A) of the Exchange Act." 

Criticizing SOS is Alan Kaplinsky, leader of the effort to enforce consumer-finance arbitration agreements with class waivers.

Sports Illustrated Teaches Arbitration 101: Football (Kneeling During Anthem) Kaepernick Arbitrator Denies Summary Judgment

Kaepernick alleges NFL teams conspired to keep him out of the league because of controversy surrounding his kneeling during the playing of the national anthem. The arbitrator, Penn Law Professor Stephen Burbank, denied the NFL's motion for summary judgment, so Kaepernick's grievance will proceed to hearing. As Sports Illustrated nicely puts it "the forthcoming trial won’t be a 'trial' as that term is commonly understood. There will be no jury, Burbank won’t be robed as a judge and it will all be conducted in private. This is because Kaepernick’s 'trial' is technically an arbitration hearing. The term 'trial' is used mainly out of convenience and because it will resemble a trial in many ways—evidence will be presented and attorneys for each side will question witnesses, who will testify under oath and swear to tell the whole and complete truth."

Summary judgment and other dispositive motions are generally considered less commonly granted in arbitration than litigation.

Trump Campaign Loses on Scope of Arbitration Clause

The Trump campaign's motion to compel arbitration of a former staffer's harassment suit was denied by a New York judge,  the ABA Journal reports.

The court found the arbitration clause of the staffer's nondisclosure agreement confines arbitration to any dispute "arising under or relating to this agreement,” but “does not require arbitration for any ‘dispute between the parties’ or even ‘any dispute arising out of plaintiff’s employment.”

The court wrote “The arbitration clause could have been written to require any disputes arising out of plaintiff’s employment to go to arbitration or that any claims brought by plaintiff against defendant must be sent to arbitration. But it did not.”

Trump Campaign Begins Arbitration Against Omarosa

Trump's 2020 re-election campaign filed the arbitration against former senior White House adviser Omarosa Manigault Newman, alleging she breached a nondisclosure agreement. CNBC reports the case was filed with the American Arbitration Association in New York City.

Shareholders Bound by Arbitration Clauses in Corporate Charters and By Laws?

Zachary D. Clopton of Cornell Law School and Verity Winship of the University of Illinois College of Law have published A Cooperative Federalism Approach to Shareholder Arbitration
128 Yale L.J.F. 169 (2018).

The abstract:
Arbitration dominates private law across an ever-expanding range of fields. Its latest target, however, may not be a new field as much as a new form: mandatory arbitration provisions built into corporate charters and bylaws. Recent developments in corporate law coupled with signals from the Securities and Exchange Commission suggest that regulators may be newly receptive to shareholder arbitration. What they do next may have dramatic consequences for whether and how corporate and securities laws are enforced.

The debate about the merits of arbitration is well worn, but its application to shareholder claims opens the door to a different set of responses. In particular, the overlapping authority of federal and state actors with respect to corporate law calls for approaches that sound in cooperative federalism. Yet cooperative-federalist approaches have been absent from recent debates about shareholder arbitration. This Essay explains why cooperative federalism is a natural fit for addressing these issues. Moreover, we marshal specific examples of cooperative solutions in this area that could help frame federal-state coordination going forward. Such a cooperative response would avoid unnecessary federal-state conflict and allow policymakers to approach shareholder arbitration with expertise, accountability, and mutual respect.

Uber Class-Waiver Arbitration Agreement Unenforceable

The First Circuit recently held that an arbitration clause contained in the online contract of the ride sharing app, Uber Technologies, Inc., is unenforceable under Massachusetts law. Cullinane v. Uber Technologies, Inc., No. 16-2023 (1st Cir. June 25, 2018).

In this case, plaintiffs, Uber riders, filed a class action in Massachusetts state court, challenging certain fees Uber charged as violations of state consumer protection laws. Uber removed the case to federal court and moved to compel arbitration based on an arbitration clause in Uber’s Terms of Service. In order to use the Uber app, the customers had to register for an Uber account and to agree to the company’s Terms of Service & Privacy Policy. The Terms of Service included an arbitration clause which required customers to resolve any disputes with Uber through binding arbitration and also contained a class action waiver. The district court granted Uber’s motion to compel arbitration and dismissed the lawsuit. The plaintiffs appealled to the First Circuit.

As Jeanne Kohler of Carlton Fields writes, the First Circuit found that Uber had not reasonably communicated its Terms of Service, including the mandatory arbitration clause, to its customers because the link to the Terms was not sufficiently conspicuous. The Court noted that Uber did not use a common method of conspicuously informing online app users of its terms by requiring users to click a box stating that they agree to the terms before continuing to the next screen. Instead, Uber displayed, on an enrollment screen, a rectangular box with the language “Terms of Service,” which customers were not required to click in order to review the contract. The Court noted that Uber’s terms were not conspicuously disclosed to its users because the link was not designed in a way that most users associate with hyperlinks and thus did not have the appearance of a hyperlink. Further, the hyperlink box was not sufficiently distinct from the rest of the screen, which had other links in bold with similarly sized font that were “more noticeable.”

Supreme Court to Decide Class Arbitration Case

Lamps Plus Inc. v. Varela, from the Ninth Circuit, concerns "Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements."

The US Chamber of Commerce wants the Ninth Circuit reversed. As Supreme Court has decided many recent arbitration cases along predictable political lines, and there was a dissent to the Ninth Circuit opinion including the famously progressive (late) Judge Reinhardt, such a reversal would fit the usual pattern. Public Citizen predictably opposes the Chamber on this case.

As John Lewis of BakerHostletler writes, "the district court interpreted the arbitration agreement to authorize class arbitration. A divided 9th Circuit panel affirmed. Judges Reinhardt and Wardlaw first distinguished Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 55 U.S. 662, 684 (2010). In Stolt-Nielsen, “silence” was “more than the mere absence of language explicitly referring to class arbitration; instead, it meant absence of agreement.” So, merely because an agreement does not expressly refer to class arbitration is not determinative according to the judges. The majority then applied California contract principles to interpret the arbitration agreement. They found the agreement was ambiguous as to class arbitration and construed it against the drafter, Lamps Plus."

Article Defending Some of the Supreme Court's Controversial Arbitration Decisions

A Short Defense of Southland, Casarotto, and Other Long-Controversial Arbitration Decisions, was just published in the Loyola Consumer Law Review.

The abstract follows:

Scalding criticism of Supreme Court arbitration decisions appeared in the 1990’s and is now widespread. Over twenty years ago, the Supreme Court held that pre-dispute arbitration clauses in adhesion contracts are generally enforceable. Thoughtful scholars then feared threats to consumers' and employees' rights, and today similarly warn that the Court’s recent arbitration decisions “will provide companies with free rein to commit fraud, torts, discrimination, and other harmful acts without fear of being sued.” Professors are not the only sources of strong language opposing the Court’s arbitration decisions. Under the heading “Forced Arbitration Destroys Individual Rights,” a 2015 federal court decision declares: “Today, forced arbitration bestrides the legal landscape like a colossus, effectively stamping out the individual’s statutory rights wherever inconvenient to the businesses which impose them. What is striking is that, other than the majority of the Supreme Court, whose questionable jurisprudence erected this legal monolith, no one thinks they got it right.”

From this alleged consensus of “No one thinks they got it right,” this Article dissents in significant part. While I have long opposed Supreme Court decisions on arbitration law’s separability doctrine and judicial review of arbitration awards, and would reduce adhesive arbitration agreements’ impact on class actions, I continue to sympathize with some of the Court’s long-controversial arbitration decisions.

I choose the word “sympathize” because I believe much of the criticism of the Court’s arbitration decisions does not sufficiently weigh the difficult position the Court was in when deciding those cases. The FAA was enacted in the 1920’s before the landmark federalism case of Erie v. Tompkins, the New Deal’s expansion of the Commerce Clause and thus of federal power to preempt state law, the growth of federal employment and consumer law in the 1960’s and 1970’s, and the ensuing explosion of class actions. Each of these enormous changes to our nation’s legal landscape conflicted with the premises underlying the FAA. While Congress could have amended the FAA to accommodate and be more consistent with these enormous changes, it did not. So, reconciling an old statute with a half century of law in tension with that statute’s premises became the Court’s task.

The Courts’ critics generally argue that the drafters and adopters of the FAA did not intend for it to: (1) preempt state law or (2) cover consumer and employment arbitration agreements. This Article responds to those arguments.

Creator of Arbitral Class Waiver, Alan Kaplinksy, Profiled

Philadelphia lawyer Alan Kaplinsky profiled by Philadelphia Inquirer:

Kaplinsky takes credit for the Arbitration Waiver, an agreement that forces bank customers (and, more recently, corporate employees) to accept arbitration to settle disputes, instead of suing or joining well-financed class-action lawsuits. Kaplinsky had feared that the bureau under Cordray would effectively ban mandatory arbitration. The Trump administration has favored the practice, protecting Kaplinsky’s legacy.

“We made a lot of money defending those suits. So you could say this goes against our self-interest,” Kaplinsky told me. “But I felt class actions were being abused.

Will Securities Exchange Comm'n Permit Arbitration Clauses in Initial Public Offerings?

As Skadden explains, "Historically, the SEC has not permitted forced arbitration clauses in IPOs. The issue last arose in the context of an IPO of a U.S. company in 2012, when the Division of Corporation Finance took the position that it would not use its delegated authority to accelerate the effective date of the company’s registration statement because it was unable to conclude that such mandatory arbitration provisions were consistent with 'the public interest and protection of investors' as required by Securities Act Section 8(a)."

Various commentators weigh in:

IPO-Related Securities Litigation and the Idea of Shareholder Claim Mandatory Arbitration
By Kevin LaCroix

The Uncertain Role of IPOs in Future Securities Class Actions, by Jeff Lubitz, Institutional Shareholder Services,

SEC Weighs a Big Gift to Companies: Blocking Investor Lawsuits
By Benjamin Bain

Employment Arbitration Agreements Widespread

Employment arbitration agreements are widespread. New York Times op-ed says:

"Sixty million employees in the United States — at places from Buffalo Wild Wings to Facebook to Goldman Sachs — are now bound by mandatory-arbitration agreements, and of those, 25 million are bound by class-action bans."

Supreme Court Enforces Employment Arbitration Agreement Waivers of Class Actions

The Court in EPIC SYSTEMS CORP. v. LEWIS predictably split 5-4 with conservative justices enforcing the class waivers and progressive justices dissenting. 

Russ Bleemer writes:

The long-running controversy involves arbitration provisions that kick in due to class waivers which prohibit employees from joining class processes—litigation or arbitration—in favor of mandatory, predispute, individualized arbitration to resolve disputes with their employers.

...

[Justice] Gorsuch’s [majority] opinion rejects a 2012 National Labor Relations Board administrative [decision] that held that FAA Sec. 2 removed mandatory individual arbitration from FAA application for employee agreements.  The Court’s opinion notes that the reasoning interfered with a fundamental attribute of arbitration.

After rejecting the Sec. 2 argument, Gorsuch dismantled the employees’ other arguments.  He develops the Supreme Court precedent concerning two clashing federal statutes, finding that the National Labor Relations Act, passed in 1935, didn’t override 1925’s FAA to require class or collective actions.

Compelling Arbitration of Claims by Plaintiff Who Did Not Sign Arbitration Agreement

Coinbase, which pays cash for bitcoin, had an arbitration clause in its contract with its customer, Crypsty, which used Coinbase's services to steal from Crypsty's customers. One of those customers, Leidel was one of the individuals who filed a putative class action against Cryptsy. Leidel and  Cryptsy's receiver then sued Coinbase, alleging Coinbase aided Cryptsy’s breaches of fiduciary duty, theft, negligence, and unjust enrichment. Plaintiffs alleged Coinbase had these duties pursuant to various federal statutes and regulations.

Coinbase moved to compel arbitration, arguing the receiver was bound by the arbitration clause that Cryptsy formed, and that the doctrine of equitable estoppel bound  Leidel the arbitration clause because his claims relied on a duty owed by Coinbase to Cryptsy’s customers that arose—if at all—under the contract including the arbitration clause.

The Eleventh Circuit affirmed denial of the motion to compel arbitration because Leidel's claims allged breach of duties imposed by the Bank Secrecy Act rather than bearing a significant relationship to the arbitration agreements.

Commentary from Manatt Phelps & Phillips LLP which provides this copy of the Eleventh Circuit's opinion

Hat Tip to Tom Witherspoon

New Book on Arbitration

Arbitration: Cases, Problems, and Practice
by Matthew H. Adler, a partner at Pepper Hamilton LLP and a lecturer at the University of Virginia School of Law.