By David Seligman
In January and February, 2016 the Fourth, Fifth, Sixth, and Tenth Circuits have issued important precedential opinions concerning mandatory arbitration agreements, and all four opinions find the arbitration requirement to be unenforceable.
Arbitration Agreements Found Inapplicable to Those Not Signatories to the Agreement
In Richmond Health Facilities v. Nichols, 811 F.3d 192 (6th Cir. 2016), the Sixth Circuit upheld Kentucky case law providing that wrongful death actions brought by beneficiaries are not subject to arbitration agreements between the defendant and the decedent because “the decedent never had an interest in the [wrongful death] claim.” Id. at 199. The decision provides important protections in the nursing home context, where beneficiaries rely on wrongful death actions to hold facilities accountable for negligence that causes death. See also NCLC’s Consumer Arbitration Agreements § 7.6.5 (7th ed. 2015).
But the value of the Sixth Circuit’s decision extends far beyond this realm. In Richmond Health, the Sixth Circuit recognized that arbitration is a creature of contract, and that the Federal Arbitration Act has nothing to stay about state laws that make unarbitrable claims that are not subject to binding arbitration agreements between the plaintiff and defendant. That principle has important consequences for state laws that provide unarbitrable qui tam claims to private parties in order for them to bring public enforcement actions on behalf of the state. See Consumer Arbitration Agreements § 1.7.4. Because those actions belong to the state they, like the wrongful death actions in Richmond Health, are not subject to private arbitration agreements between consumers and businesses.
In Al Rushaid v. Nat’l Oilwell Varco, Inc., 2016 WL 660105 (5th Cir. Feb. 17, 2016)—a commercial litigation case involving petroleum producers and drilling equipment manufacturers—the Fifth Circuit addressed whether defendants that had not entered into arbitration agreements with the plaintiff could nonetheless rely on arbitration agreements between the plaintiff and other defendants based on the theory of “equitable estoppel.” The court found that doctrine inapplicable because the plaintiff was not seeking to benefit from the contract that contained the arbitration clause in its suit against the nonsignatory defendants: “[w]hile the action is related to contracts . . . it cannot be said that plaintiffs are seeking direct benefits from the contracts. Id. at *4.
Over the past few years, the “equitable estoppel” theory has been invoked by a multitude of defendants seeking to compel arbitration of claims brought by plaintiffs with whom they have no direct contractual relationship. Consumer Arbitration Agreements § 7.5.3. Perhaps losing sight of the fact that arbitration is a creature of contract and that equitable estoppel is fundamentally an equitable argument that should not support efforts to insulate wrongdoing from liability—some courts have applied the theory in novel contexts, for example in suits against originating banks that facilitate predatory payday lenders. Consumer Arbitration Agreements § 220.127.116.11.6. The Fifth Circuit’s opinion might represent a return to traditional conceptions of equitable estoppel.
Arbitration Cannot Prevent Vindication of Federal Statutory Rights
The Supreme Court’s Italian Colors case upheld a waiver of the ability to bring class arbitration even though it prevented vindication of federal statutory rights. The Fourth and Tenth Circuits have recently ruled that this is limited to waivers of class arbitration, and that other limits on arbitration that prevent vindication of federal rights can make the arbitration agreement unenforceable. The “effective vindication” doctrine is alive and well and still operates to invalidate other kinds of unfair terms in arbitration agreements.
In Nesbitt v. FCNH, Inc., 811 F.3d 371 (10th Cir. 2016), a massage therapy school had required its students to give massages to customers without pay. When the students sued for wage-and-hour violations, the school sought to compel arbitration based on a clause that required the students to pay exorbitant arbitration fees pursuant to the American Arbitration Association’s Commercial Rules.
The court held, among other things, that these fees would prevent the plaintiffs from effectively vindicating their rights under the Fair Labor Standards Act. Notably, the court dismissed the defendant’s arguments that the plaintiffs could escape truly unfair fees through AAA procedures that allowed them to obtain a fee waiver or reduction or by recovering costs if they prevailed: no “employee in [the plaintiff’s] position, faced with the mere possibility of being reimbursed for arbitrator fees in the future, would risk advancing those fees in order to access the arbitral forum.” Id. at 377 (internal quotation marks omitted); see also Consumer Arbitration Agreements § 4.5.4.
In Hayes v. Delbert Servs. Corp., 2016 WL 386016 (4th Cir. Feb. 2, 2016), the Fourth Circuit evaluated the enforceability of an arbitration clause in payday loans provided by Western Sky Financial, a tribal lender purporting to operate off of the Cheyenne River Indian Reservation in South Dakota. A prior version of the arbitration agreement at issue had been invalidated by the Seventh Circuit because it designated a tribal arbitration provider that, in fact, did not exist. See § 5.8.1. The form of the agreement at issue in Hayes designated AAA as the arbitration administrator but provided that tribal law, and not federal law, applied.
Judge Harvey Wilkinson, writing for the court, excoriated the arbitration clause. He observed that although “[a] party to an arbitration agreement may of course agree to waive certain rights as part of that agreement,” including for example the right to a jury trial, “a party may not underhandedly convert a choice of law clause into a choice of no law clause—it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” Id. at *8; see also Consumer Arbitration Agreements § 4.4.