I have over the years become less and less a fan of mandatory arbitration clauses in contracts. The arbitration process is fraught with procedural unfairness and inherent bias for one or both of the parties thereto, and arbitration using one of the major arbitration houses like the AAA is less and less likely to result in much cost savings over a real trial where due process and fair process rights are more likely to be enforced.
Alternatives to consider include using a smaller arbitration house in place of a mandatory arbitration clause with a large arbitration house like the AAA, and including in such specification the necessary procedural safeguards as necessary to protect your client. However, as the case below from the U.S. Supreme Court amply demonstrates, any kind of arbitration clause enforceable under the Federal Arbitration Act has the potential for some very unpleasant surprises, such as having a party to the contract forced into arbitration with a party who was NOT a signatory or party to the original written agreement containing the arbitration clause. Somehow lawyers used to think that mandatory arbitration clauses were a matter of contract and the parties invoking arbitration actually had to have a written agreement between them before they could be forced into arbitration. Not so according to the Supremes.
Except for certain cases where a very large company is your client and that client wants to squash as much as possible the rights of individual consumers to bring lawsuits and plaintiffs lawyers to bring class action lawsuits against your large client, it might well be the better practice is to avoid a mandatory arbitration clause completely, in favor of a waiver of all rights to a jury trial by all parties to the agreement. With a bench trial you avoid the expense and delay of a jury trial, but you preserve the procedural and due process fairness safe guards present in our court system. Some clients may not need or want such safeguards and rights to appeal preserved, but for some clients that is exactly the best thing to do for them.
ARTHUR ANDERSEN LLP ET AL. v. CARLISLE ET AL. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT No. 08-146.
Argued March 3, 2009-Decided May 4, 2009 After consulting with petitioners, respondents Wayne Carlisle, James Bushman, and Gary Strassel used a shelter to minimize taxes from the sale of their company. Limited liability corporations created by Carlisle, Bushman, and Strassel (also respondents) entered into in-vestment-management agreements with Bricolage Capital, LLC, that provided for arbitration of disputes. After the Internal Revenue Service found the tax shelter illegal, respondents filed a diversity suit against petitioners. Claiming that equitable estoppel required respondents to arbitrate their claims per the agreements with Bricolage, petitioners invoked §3 of the Federal Arbitration Act (FAA), 9U. S. C. §3, which entitles litigants to stay an action that is “referable to arbitration under an agreement in writing.” Section 16(a)(1)(A) of the FAA allows an appeal from “an order . . . refusing a stay of any action under section 3.” The District Court denied petitioners’ stay motions, and the Sixth Circuit dismissed their interlocutory appeal for want of jurisdiction.
Held:
1. The Sixth Circuit had jurisdiction to review the denial of petitioners’ requests for a §3 stay. By its clear and unambiguous terms, §16(a)(1)(A) entitles any litigant asking for a §3 stay to an immediate appeal from that motion’s denial-regardless of whether the litigant is in fact eligible for a stay. Jurisdiction over the appeal “must be determined by focusing upon the category of order appealed from, rather than upon the strength of the grounds for reversing the order,” Behrens v. Pelletier, 516 U. S. 299, 311. The statute unambiguously makes the underlying merits irrelevant, for even a request’s utter frivolousness cannot turn a denial into something other than “an order . . . refusing a stay of any action under section 3,” §16(a)(1)(A).
2. A litigant who was not a party to the arbitration agreement may invoke §3 if the relevant state contract law allows him to enforce the agreement. Neither FAA §2-the substantive mandate making writ-ten arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of a contract”-nor §3 purports to alter state contract law regarding the scope of agreements. Accordingly, whenever the relevant state law would make a contract to arbitrate a particular dispute enforceable by a nonsignatory, that signatory is entitled to request and obtain a stay under §3 because that dispute is “referable to arbitration under an agreement in writing.” Because traditional state-law principles allow enforcement of contracts by (or against) nonparties through, e.g., assumption or third-party beneficiary theories, the Sixth Circuit erred in holding that §3 relief is categorically not available to nonsignatories. Questions as to the nature and scope of the applicable state contract law in the present case have not been briefed here and can be addressed on remand. Pp. 5-8 521 F. 3d 597, reversed and remanded. SCALIA, J., delivered the opinion of the Court, in which KENNEDY, THOMAS, GINSBURG, BREYER, and ALITO, JJ., joined. SOUTER, J., filed a dissenting opinion, in which ROBERTS, C. J., and STEVENS, J., joined.
Here this California case upholds both the denial of the use of a class action procedure by one of the litigants, and rules such denial is not unconscionable:
Dalie, et al. v. Pulte Home Corp., No. CIV. S-08-337 (E.D.CA, April 28, 2009)Court Grants Motion to Compel Arbitration and to Strike Class Allegations, Finding Arbitration Provision Not Unconscionable: A federal court in California granted a motion to compel arbitration and to strike class allegations in a case brought by four homeowners challenging an alleged practice by the defendant builders of reinsuring title insurance policies through a company owned by the builders. Plaintiffs’ purchase agreements contained a broad mandatory arbitration clause, which also prohibited plaintiffs from joining their claims with the claims of other homeowners. Plaintiffs nevertheless filed suit seeking to represent a nationwide class of individuals that purchased a home from one of the defendants, alleging violations of the Real Estate Settlement Procedures Act and related common law claims. On defendants’ motion, the court held the arbitration provision was neither substantively nor procedurally unconscionable, and granted defendants' motion to compel arbitration on all arbitrable claims and to strike the class allegations.
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