After the significant cases discussed in Tuesday’s ADR Highlights, today is a more routine day.  However, there are good reminders of some basic principles – and what I would consider, an ominous opening into mediation confidentiality.

Discovery from mediator

Because of mediation’s confidential nature, there are a generally more decisions regarding the arbitration arm of ADR.  Roberts v. Consolidated City of Fairbanks, 2021 U.S. Dist. LEXIS 164486 (D. Alaska August 31, 2021), is an important exception to that rule.

The details of the settlement agreement from which this dispute arises are not set out in the opinion.  However, the parties here litigate over the effect thereof.  As a part of their case preparation, defendants sought to depose the mediator who facilitated the settlement; plaintiffs opposed the deposition.  The court, Gleason, J., overrules the objection and allows the deposition.  The Court centers its consideration on Fed. R. Civ. P. 26(c).  Since the mediator was “a neutral participant at the mediation and is likely to have discoverable information regarding Plaintiffs’ specific claims about the mediation process,” the court holds that her testimony is relevant and not privileged. Unfortunately, Judge Gleason provides no detailed analysis of how she reaches her conclusion on privilege, opining merely that “There is no federal mediation privilege in the federal rules and the Ninth Circuit has not recognized a mediation privilege under the federal common law.”  Significantly, though, she rejects Alaska’s statutory provision that “[t]he mediator shall not testify as to any aspect of the mediation proceedings,” see Alaska Rule of Civil Procedure 100(g), and holds that, in an action alleging federal claims, the court is not bound by state privilege law.

The case is concerning to anyone engaged in mediation, either as a party or a neutral.  Successful mediations require that parties be able to speak freely, including a discussion of the weaknesses of their own case – information they clearly would not want to have shared outside the room.  Decisions such as this one, while a rarity, cut into the core assumption that the parties can be open in such sharing.  Therefore, the lessons from Roberts are two-fold. First, be sure that the parties to the mediation sign a confidentiality agreement and that everyone in the room does the same, regardless of what protections you believe state law may provide.  Second, where, as appears to be the case here, the party seeking discovery from the mediator was not a party to the negotiations, courts must set a high bar to require disclosure. Rule 26(b)’s proportionality test gives federal judges that discretion and most state procedure codes provide similar opportunities.

Timing of arbitration agreements/unconscionability

Watkins v. Rapid Financial Solutions, Inc., 2021 U.S. Dist. LEXIS 163544 (D. Nev. August 30, 2021), focuses our attention on the relationship between the timing of a debit card’s activation and the disclosure of the existence of an arbitration provision.

The facts are unusual.  Plaintiff was a state prisoner who, prior to his release, was given a “release” card, issued by defendant, which had been pre-loaded with $431.21, his earnings while incarcerated. (In light of the current fires in the West, it is interesting to note that Watkins was employed as a firefighter at a Conservation Camp and earned $1.00 per hour, of which 10¢ was deposited into his account).  He claimed that he was not given the option to receive the funds in any other way.  On April 6^th, while still in prison, he activated the card. On April 13^th, he was released – by being dropped off with his card at a 7-11 down the street from the prison – and was given the physical card, along with a brochure which contained terms and conditions, including an arbitration clause.  He tried to buy a bus pass and the card was rejected. After a phone call, however, it became active.

Watkins brought this class action, alleging that the process of requiring prisoners to obtain their funds through the use of release cards, which results in the deduction of “weekly fees,” ATM fees and other charges against those funds, is a violation of state and federal law. Defendant sought arbitration under the provisions contained in the terms and conditions. The court, Du, J., denies the motion to compel arbitration. A key consideration in her reasoning is the timing of the activation of the card.  The court holds that, since the prisoner activated the card while in prison and before receiving the terms and conditions, there was “no meeting of the minds and no mutual assent” that access to the funds deposited therein would require an agreement to arbitrate.  Further, the court holds, the agreement was both procedurally and substantively unconscionable.  Since Walker was never told that he could obtain his funds in any way other than through the use of the card, the contract is one of adhesion and, therefore, procedurally unconscionable.  Further, since, under the terms and conditions contained in the brochure, the only way that Walker could access his money was to “renounc[e] his right to sue or bring a class action,” the agreement is substantively unconscionable.  The court, accordingly, denies the defendant’s motion to compel on both contract formation and unconscionability grounds.

To the extent that Judge Du’s analysis is correct, the lesson for those seeking to impose arbitration is one of timing. Be sure that all terms and conditions are presented to the counterparty before he or she can take any steps toward implementing the transaction.  Here, the court opines, there was a fatal one-week lag between activation of the card and the presentation of those terms.

Litigation waiver

Breedlove v. Santander Consumer USA, Inc., 2021 U.S. Dist. LEXIS 163250 (S.D. Ind. August 26, 2021) addresses the question of whether a party’s litigation activities constituted a waiver of any right it might have to compel arbitration.  While the case does not break any new ground, because we have not addressed such waiver in a while it is worth considering as a refresher.

Breedlove filed a class action, alleging that Santander violated the Fair Credit Reporting Act by improperly accessing her credit report.   Santander sought to compel arbitration under the terms of retail installment contracts under which Plaintiff financed a car through the bank.  The court, Lynch, Magistrate Judge, holds that Santander’s activities during the seven-month interim between the filing of the case and its motion to compel constituted an implied waiver of arbitration.  Those activities included the filing of an answer which did not mention arbitration, the preparation and filing of a case management plan, the initial pretrial conference and a subsequent status conference, consents to amendment of the complaint, and discovery. These steps in preparation for trial, along with the seven-month delay, the court opines, “demonstrate[] that Santander did not act with diligence in moving to compel arbitration and engaged in active participation in the litigation inconsistent with a right to arbitrate.” Such steps, the court holds, impacted plaintiff by forcing her to address motions for class certification and to engage in discovery that “Santander’s demand for arbitration makes irrelevant based on the contract language precluding class arbitration. Thus, Santander’s delay in opting for arbitration caused prejudice to the plaintiff, who was forced to expend resources on discovery, strategy and case management analysis related to class issues that are wasted if she must prosecute her claims on an individual basis in arbitration.”  Further, the court holds that the discovery processes in which Santander engaged may not have been available to it in arbitration, “because the Federal Rules of Civil Procedure do not have counterparts in an arbitration forum.”  Santander claimed that it did not consider arbitration relevant until the plaintiff amended her complaint about three months before it filed the motion to compel arbitration.  The court rejects that claim, thus highlighting the lesson of this and similar cases.  If a defendant has any possible claim that the litigation should move to arbitration, it should not risk losing the benefit of the agreement; it should assert the right to arbitrate at the first opportunity and continue to do so every time that it can.

Who may enforce an arbitration provision

Madorskaya v. Frontline Asset Strategies, LLC,  2021 U.S. Dist. LEXIS 164995 (E.D.N.Y August 31, 2021), addresses the issue of whether a collection agency may enforce an arbitration agreement which the plaintiff entered into as part of the underlying transaction.  The scenario setting up the case is fairly typical.  Plaintiff entered into a credit card agreement with Citibank; the agreement contained an arbitration clause with Citibank. After Citibank charged off her account for non-payment, it sold the loan to a fund which, in turn, placed the debt with Frontline for collection. Frontline is a debt collector who collects amount “alleged to be owed or due to others.” Although the credit card debt was settled by stipulation, Madorskaya brought this Fair Debt Collection Practices Act against Frontline, who sought to compel arbitration under a provision in the initial credit card agreement between plaintiff and Citibank. The issue before the court, Chen, J., was whether the debt collector could take advantage of the provision, either because of the language of the agreement or under concepts of equitable estoppel or agency.

The decision focuses heavily on South Dakota law and is laden with case law from that jurisdiction. Since a number of prominent credit cards select South Dakota as the governing substantive law, lawyers on either side of credit card litigation should read the case for that reason alone.  However, its contract interpretation has a broader implication. The agreement contained two relevant provisions. First, it provided that “[y]ou or we may arbitrate any claim, dispute or controversy between you and us arising out of or related to your Account, a previous related Account or our relationship.”  (Bold face in opinion). “We” is defined as “Citibank, N.A.”  Frontline claimed the right to arbitrate because the arbitration clause covers “Claims made by or against anyone connected with us with us or you or claiming through us or you. . . .”  The court rejects the argument, holding that the language defendant references describes the type of claims which are subject to arbitration; the identity of those who may invoke arbitration, per the bold-faced language above, is limited to those within the definition of “we,” i.e., Citibank, N.A.  Since this type of bifurcated language is contained in many consumer contracts, the case is worth throwing in your arbitration notebook, both for citing by plaintiffs and for distinguishing by defendants.

Quick Hits –

Arbitrability of time limits for commencing arbitration

Alliance Health and Life Insurance Company v. American National Insurance Co., 2021 U.S. Dist. LEXIS 164498 (E.D. Mich. August 31, 2021), is a reminder that violations of time limits contained in an arbitration agreement may themselves be subject to arbitration. The reinsurance agreement between the parties provided that “no arbitration may be commenced more than 3 years after the Effective Date of this Agreement.” The Effective Date was January 1, 2016; the plaintiff filed the arbitration on September 10, 2020.  The court, Borman, J., holds that the timeliness of the filing should be referred to the arbitrator, under language in the Reinsurance Agreement providing that “any dispute with reference to the interpretation of this agreement or [the parties’] rights . . . . shall be submitted to three arbitrators.”

Literature

Two good articles on non-judicial dispute resolution appeared recently. Press, Ethical Considerations when ADR Practitioners Wear Different Hats, 38 GP Solo 56, July/August 2021 (a publication of the ABA Solo and Small Practice Section), considers the interface between the ABA Model Rules of Professional Conduct and the Model Standards for Conduct of Mediators. Silverberg and Eiseman, Debunking Misperceptions the Upsides of Commercial Arbitration, 47 Litigation 47, Summer 2021 (a publication of the ABA Section of Litigation), considers questions which litigators think about in deciding whether to take their dispute to arbitration. Both articles are available on LEXIS.

Have a good Labor Day.  With COVID shutdowns and limitations, it has been a strange summer.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com