This is holiday week, so the courts are quieter and there are fewer cases. However, we get a look at some general principles, Section 1 of the FAA, and a fascinating law review article.
No Unilateral Obligation to Arbitrate
Brown v. Stored Value Cards, Inc., 2022 U.S. App. LEXIS 35402 (9th Cir. December 22, 2022)(Mem.)(Judges Clifton; Bumatay; and Baker of the Court of International Trade, sitting by designation), emphasizes what is possibly the most basic principle in arbitration: the process derives its existence from the agreement of the parties.
Upon a prisoner’s discharge from detention, the Oregon corrections system returned any money which it took from him or her by way of a loaded debit card from which fees or charges would be deducted. As a result, the prisoner did not receive the full amount which he or she surrendered when imprisonment began. Brown brought a class action for damages against the companies who issued the cards. The defendants moved to compel arbitration pursuant to the “Cardholder Agreement” which accompanied the card. The District Court denied the motion, and the Ninth Circuit affirms.
The Agreement provided that “[b]y accepting this card, you agree to be bound by these terms and conditions,” including an arbitration mandate. However, the releasee had no choice but to accept the card. As the court opines, “No subclass member requested the card in lieu of the cash confiscated by authorities when those members were taken to jail.” Therefore, the court holds, there was never the “mutual assent” needed to form an agreement. (Emphasis in opinion). “Defendants cannot unilaterally impose a contract . . . . “
Unconscionability and Severability
In Escobar v. National Maintenance Contractors, LLC., 2022 U.S. App. LEXIS 35276 (9th Cir. December 21, 2022)(Mem.)(Judges McKeown, Miller, and Mendoza), plaintiffs alleged that, although their agreement with National designated them as franchisees, they were actually employees and were denied payments due to them under that latter status. The District Court granted Defendants’ motion to compel arbitration. (The Court of Appeals holds, without explanation, that it has jurisdiction under 28 U.S.C. § 1291, which provides for appeals from final judgment. Therefore, it appears that, although the opinion does not say so, the District Court dismissed, rather than stayed, the action upon compelling arbitration). Under applicable Oregon and Washington law, “a cost-sharing provision is unconscionable if it denies parties the opportunity to vindicate their rights because of their inability to pay.” Finding that the plaintiffs provided “undisputed evidence about the costs of arbitration and how those costs would prevent them from bringing their claims,” the Ninth Circuit, unlike the District Court, finds that the arbitration agreement’s cost-sharing provision is unconscionable. The more interesting part of the opinion flows from that holding, as the court refuses to enforce the contract’s severability clause. The District Court had found two other provisions of the agreement to be unconscionable – an assessment in which the Court of Appeals concurred. Therefore, the court holds, “severance is inappropriate here because the arbitration agreement is permeated with unconscionable provisions.” “We cannot sever an unconscionable provision if doing so would require us to rewrite the contract. Severing the cost-sharing provision would require exactly that because, in the absence of the provision, it would fall to us to decide who should bear the costs of arbitration.” Accordingly, the court holds that the entire arbitration agreement is unenforceable and reverses the District Court.
Intertwined Estoppel; Challenge to Delegation Provisions
As discussed Brown, above, most arbitration mandates depend on the agreement of the parties. However, there are circumstances in which the plaintiff’s claims against a defendant who is not a party to the arbitration clause are so closely related to or so dependent upon the provisions of the contract containing the provision that denying the defendant the benefit thereof would be inequitable. The requirements of that estoppel are governed by state law. Sitzman v. EK Real Estate Service of NY LLC, 2022 U.S. Dist. LEXIS 230302 (N.D. Tex. December 21, 2022)(Brown, J.), applies the Texas version of the doctrine, which arises where “the non-signatory ‘(1) has a close relationship with one of the signatories and (2) the claims [against the non-signatory] are intimately found in and intertwined with the underlying contract obligations.’” (Citation omitted).
The action arose out of a residential sale-lease back contract, under which the plaintiffs, who were in the process of being foreclosed upon, sold their home to Defendant EK Real Estate, with provisions allowing them to rent the home and granting an option to repurchase. The contract was arranged by Defendant EasyKnock, EK’s parent. EK obtained a mortgage from LendingOne to finance its purchase. Plaintiffs brought this action, claiming that the transaction was a disguised usurious loan and that it violated numerous federal and state statutory and common law obligations. Defendants moved to compel arbitration under the provisions of the lease between plaintiffs and EK Realty. The court grants the motion as to EK, a signatory to the lease, and EasyKnock as its sole member. However, Judge Brown denies the motion as to LendingOne, finding that LendingOne neither has a corporate relationship with EK nor is designated as a third-party beneficiary of the agreement.
The court also holds that issues related to the enforceability of the arbitration clause under the Truth-in-Lending action and Texas public policy and the alleged unconscionability of the entire agreement and of the arbitration clause itself have been delegated to the arbitrator through the invocation of the AAA’s Commercial Rules. Rule 7(a) thereof gives the arbitrator the power to decide his or her own jurisdiction, and it is now almost uniformly held that an agreement’s designation of those rules carries with it delegation of threshold issues. So, nothing new there. But, the case is a reminder of another basic concept, the nesting Matryoshka doll principle of an unconscionability attack. The plaintiff claimed that the entire arbitration clause was unconscionable and, therefore, that the delegation clause which rested therein should not be enforced. However, the court recognizes that any unconscionability claim must be pinpointed directly at the delegation clause itself; attacking the entire arbitration clause in which it nests does not avoid delegation. Accordingly, Judge Brown compels arbitration as to EK Real Estate and EasyKnock, but denies the benefits thereof to LendingOne.
Uber Drivers Do Not Fall within the “Transportation Worker” Exception to the FAA
Golightly v. Uber Technologies, Inc., 2022 U.S. Dist. LEXIS 229911 (S.D.N.Y. December 21, 2022)(Liman, J), follows a now-familiar pattern in holding that the provision of Uber’s driver contract compelling arbitration of any dispute is enforceable. The background is generally recognized by arbitration nerds and employment lawyers. Section 1 of the Federal Arbitration Act excludes from its coverage the “contracts of employment of seamen, railroad employees, or any other class of worker engaged in foreign or interstate commerce.” (emphasis added). Plaintiff alleges that Uber’s background checks violate New York’s Human Rights Law and the Fair Credit Reporting Act. Uber moved to compel arbitration. The court grants the motion, holding that interstate driving is not “an indelible and ‘central part of the job description.’” (Citation omitted). In reaching this finding, Judge Liman considers national statistics as to the percentage of Uber driving which crosses state lines and the percentage of income derived therefrom, the advertised job description of an Uber driver, and the experience requirements demanded of drivers.
While the case breaks no new ground, it is interesting in two respects. First, it cites to a variety of cases on both sides of the “residual exception” question and, therefore, serves as a valuable starting point for anyone addressing the question. Second, it distinguishes Uber drivers from Lyft drivers, implying that it is a closer question as to whether the latter are covered by the FAA. In distinguishing cases in the District holding that Lyft drivers are exempt from the FAA, the court opines that, in those cases, Lyft had “marketing partnerships with airlines” and “’worked to integrate transportation services with Delta airlines,’ allowing passengers to book Lyft rides through the Delta app and to pay for the rides using Delta SkyMiles.” (Some of these relationships may no longer be in place).
David M. Bigge has written an article that is a far cry from Uber drivers. In “Article: Interstate Dispute Resolution at a Crossroads: Reconsidering the I m Alone Arbitration, 46 Hastings Int’l & Comparative L. Rev. 91 (Winter 2023), he takes a look back at an arbitration between the U.S. and Canada arising out of the sinking in 1929 of a rum runner by the Coast Guard. In addition to a great description of a chase at sea, Bigge explores the dispute’s role in moving international arbitration from diplomacy and principles of ex aequo et bono to today’s formalized treaty proceedings. The article is available on Lexis at ARTICLE: Interstate Dispute Resolution at a Crossroads: Reconsidering the I m Alone Arbitration, 46 Hastings Int’l & Comp. L. Rev. 91 (lexis.com)
Have a good week. If you’re off work, enjoy it; if you have a year-end deadline, bear it.
David A. Reif, FCIArb