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ALR 2016 - 2017

Third Circuit Adopts “Futility Exception” to Delayed Motions to Compel Arbitration

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By: Jonathan Vaitl

In a 2-1 decision issued in September 2016, the Third Circuit became the latest circuit to adopt an exception that excuses a failure to file a timely motion to compel arbitration if the motion would be futile, or all but certain to fail.[1] Despite two and a half years of litigation, which began in 2009 and involved over $57,000 of discovery costs, the court granted Defendants’ motion to compel two-party (or non-class) arbitration based on Defendants’ argument that a timely motion would have been futile under New Jersey law.

The law in question – Muhammad v. Cty. Bank of Rehoboth Beach, DE, a 2006 decision by the New Jersey Supreme Court – was motivated by a class action waiver in an adhesive contract. Muhammad prohibited courts from compelling two-party arbitration in adhesive consumer contracts that expressly waived a plaintiff’s right to join in class arbitration.[2] The case before the Third Circuit, though, did not concern an arbitration clause barring class arbitration. In fact, the arbitration clause in question made no mention at all of class arbitration. A motion to compel arbitration under the arbitration clause arguably would have allowed for either two-party or class arbitration.

Rather than compelling arbitration, Defendants heavily contested the case before the District Court of New Jersey, resulting Plaintiffs incurring costs of over $57,000, mostly related to experts and centered on class certification. Eventually, the U.S. Supreme Court bailed out the Defendants with two decisions. The first was Stolt-Nielson S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), through which the Defendants learned that their silence regarding class arbitration did not necessarily signal their consent. The second was AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), where the Court held that the Federal Arbitration Act (“FAA”) preempted state laws that had prohibited parties from compelling two-party arbitration in some situations, even if the parties specifically agreed to it by contract.

The majority concluded that after AT&T Mobility, the FAA preempted Muhammad and gave Defendants a right to compel two-party arbitration – a right, the majority determined, that Defendants did not have before. However, in doing so, the majority read Muhammad broadly – too broadly, in the view of Judge Rendell, who dissented. Read within the context of its facts, Muhammad held that arbitration clauses in adhesive contracts that barred class arbitration were unconscionable and courts could not compel two-party arbitration in those circumstances. The majority, though, expanded on that rationale and held that Muhammad would have prevented Defendants from enforcing their arbitration clause, not because the arbitration clause only allowed for two-party arbitration, but merely because Defendants preferred two-party arbitration. Rather than considering that the court would have enforced the arbitration clause, which could have taken the form of either two-party or class arbitration, the Third Circuit concluded that a court almost certainly would have denied the motion to compel because Defendants wanted two-party arbitration, which Muhammad would not allow.

The Third Circuit’s decision to adopt the futility exception, while consistent with four circuits before it,[3] makes for sloppy precedent by softening the standard for futility and reading the prior “controlling” case law too broadly. Judge Rendell, in her dissent, says it best: “I reject that view [that Muhammad would have been controlling], and urge you to read Muhammad and the actual arbitration clauses at issue here. Doing so will lead inexorably to one conclusion: this case is not Muhammad, and a motion by the Defendants in 2009 to compel arbitration thus would have been anything but futile.”[4]

Endnotes:

[1] Chassen v. Fidelity National Financial, Inc., No. 15-3789, 2016 WL 4698256 (3d Cir. Sep. 8, 2016).

[2] Muhammad v. Cty. Bank of Rehoboth Beach, DE, 912 A.2d 88 (N.J. 2006).

[3] Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989); Peterson v. Shearson/American Exp., Inc., 849 F.2d 464 (10th Cir. 1988); Miller v. Drexel Burnham Lambert, Inc., 791 F.2d 850 (11th Cir. 1986); Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986).

[4] Chassen, 2016 WL 4698256, at *9 (Rendell, J., dissenting).

ALR 2016 - 2017

FCC Moves Closer to Banning Mandatory Arbitration Clauses in Consumer Communications Contracts

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By: Jonathan Vaitl

The Federal Communications Commission (“FCC”) recently announced that it has begun internal processes toward a proposed rule that would ban or restrict mandatory arbitration clauses in consumer contracts with Internet Service Providers (“ISP”) and wireless service providers.[1] The FCC expects to produce a Notice of Proposed Rulemaking by February 2017.

The FCC’s announcement comes on the heels of an editorial in Time by FCC Commissioner Mignon Clyburn and Senator Al Franken attacking the practice of mandatory arbitration clauses in these consumer contracts as unfair and harmful.[2] In the editorial, Commissioner Clyburn and Senator Franken note that a study by the Consumer Financial Protection Bureau in March 2015 found that 99.9% of wireless contracts contained a mandatory arbitration clauses, of which 99.7% also specifically prohibited class-action lawsuits.[3] Senator Franken has introduced legislation to ban pre-dispute arbitration clauses in consumer contracts, but the bill has stalled.[4] With Senator Franken’s bill being dormant since it was referred to the Judiciary Committee on April 29, 2015, the FCC may offer the best chance of restricting or banning the use of arbitration clauses in these types of contracts.

The concern for Senator Franken and the FCC is the inability to bring class-action lawsuits. This goes right to the heart of AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), in which the U.S. Supreme Court held that an arbitration agreement waiving consumers’ right to bring contract claims as a class was valid. In the realm of Internet or wireless provider contracts, the damages any single consumer might suffer is likely too insignificant to warrant the expense of a dispute. In the view of Franken and the FCC, if consumers cannot band together to fight against “surprise fees” or price increases, then they lack all power to hold Internet and wireless providers accountable.

The FCC likely would not promulgate a rule until the end of 2017, and likelihood even of a proposed rule may depend on the outcome of the presidential election. Support for this type of restriction has rested almost entirely with Democrats. A Republican president may alter the makeup of the FCC (currently three Democrats and two Republicans), which could spell the end of this effort. Regardless, this remains worth watching, as mandatory arbitration clauses in consumer contracts affects virtually all of us.

Endnotes:

[1] Federal Communications Commission, Protecting the Privacy of Customers of Broadband and Other Telecommunications Services, WC Docket No. 16-106 (2016) (statement of Chairman Tom Wheeler).

[2] Senator Al Franken & Mignon Clyburn, How Your Internet Provider Restricts Your Rights, Time (Oct. 23, 2016), http://time.com/4541176/al-franken-arbitration-clauses/?iid=sr-link2.

[3] Consumer Financial Protection Bureau, Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a) (March 2015), http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.

[4] See S.1133 Arbitration Fairness Act of 2015

ALR 2016 - 2017

Federal Courts Weighing Questions on Nursing Home Arbitration Agreements

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By: Jonathan Vaitl

Two cases currently in the federal court system could have significant implications for mandatory pre-dispute arbitration agreements in nursing home admission agreements.

The U.S. Supreme Court heard arguments this month in a consolidation of three case involving a Kentucky nursing home owned by Kindred Nursing Centers LP (“Kindred”).[1] The case centers on pre-dispute arbitration agreements in nursing home admission agreements. The incoming residents who were bound by the arbitration agreements did not personally sign the agreements; family members with power of attorney signed them. When the family members brought wrongful death lawsuits against the nursing home in state court, Kindred sought to enforce the arbitration agreement.

The case initially went to the Kentucky Supreme Court. The Kentucky Supreme Court found that the agreements were unenforceable because of a Kentucky state law that required a power of attorney instrument to specifically empower the attorney-in-fact to enter arbitration agreements. That specific empowerment was missing from the power of attorney instruments in this case.

Now the case will be decided by the U.S. Supreme Court. The plaintiffs argue that this case is about agency law and simple contract formation, which is properly governed by the states. Kindred, on the other hand, argues that the Federal Arbitration Act (“FAA”) preempts state law related to arbitration agreements.

The Kindred case may turn out to be moot, however, depending on a ruling by the Fifth Circuit. Last September, the Department of Health and Human Services (“HHS”) issued a final rule prohibiting nursing homes that accept Medicare and Medicaid from requiring pre-dispute arbitration agreements as a condition of admission. [2] The American Health Care Association challenged the rule’s legality, resulting in a federal court blocking the rule from going into effect. That case has been appealed to the Fifth Circuit, which is currently taking briefs in the matter.[3]

If the HHS ban survives, the Supreme Court’s ruling, whatever it may be, will be left with little direct impact on the specific parties to the actions. However, the Court’s ruling still will likely further clarify the scope of the FAA’s preemption. If the Court finds that the arbitration agreement is valid, then the federal government will effectively be intervening in state agency law as it relates to arbitration agreements.

Nursing homes stand to lose the most in both cases. Attempts to minimize the cost of disputes may become more difficult if nursing homes are not able to enforce arbitration agreements because of state agency laws or federal rules. It will be interesting to see whether the federal courts continue to push the liberal federal policy in favor of arbitration, or if some of the state anti-arbitration efforts finally take hold.

Endnotes:

[1] Kindred Nursing Centers Limited Partnership v. Clark, No. 16-32 (U.S. argued Feb. 22, 2017).

[2] Centers for Medicare & Medicaid Services, CMS Finalizes Improvements in Care, Safety, and Consumer Protections for Long-Term Care Facility Residents, CMS.gov (Sep. 28, 2016) https://www.cms.gov/Newsroom/

MediaReleaseDatabase/Press-releases/2016-Press-releases-items/2016-09-28.html.

[3] Am. Health Care Ass’n v. Burwell, No. 17-60005 (5th Cir. filed Jan. 5, 2017).

ALR 2016 - 2017

Arbitrability of Claims Regarding Nursing Home Negligence

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By: Faith Van Horn

The Georgia Supreme Court held this month in United Health Services of Georgia v. Norton that a wrongful death claim brought by the husband of a nursing home resident was barred by the arbitration agreement signed by the patient.[1]  Before she was admitted to the defendant nursing home, Mrs. Norton, the patient, signed an arbitration agreement through Kim Norton, her general power of attorney, which expressly stated that it applied to claims brought for wrongful death.[2]  The court held that Mr. Norton’s claims for wrongful death was covered by the arbitration agreement.[3]  Below, the Georgia Court of Appeals had held that Mr. Norton’s wrongful death claim was not covered by the arbitration agreement.[4]  The court held that wrongful death claims “belong to the survivors” and are “not addressed to the injuries suffered by the decedent prior to death.”[5]  The Georgia Supreme Court reversed, holding that a wrongful death action is merely a continuation of whatever claims for injury the decedent would have had while she was living.[6]

The Iowa Supreme Court has reached the same conclusion as the Georgia Supreme Court on the issue of whether such wrongful death claims are covered by pre-dispute arbitration agreements signed with nursing homes.  However, in Roth v. Evangelical Lutheran Good Samaritan Society the Iowa Supreme Court provided a more thorough explanation as to which claims are or are not covered by an arbitration agreement signed by the decedent.[7]  In Roth, the court looked to the nature of the claims involved, explicitly distinguishing between wrongful death claims brought by a representative of the estate and loss of consortium claims brought by the adult children of the decedent.  The court in Roth held that the arbitration agreement signed by the decedent (through the decedent’s son who held general power of attorney for him) did cover wrongful death claims brought by his estate, but that the loss of consortium claims were not covered.[8]

The court in Roth reasoned that the statutes providing the basis for wrongful death claims do not create a new cause of action, but merely preserves the rights and claims the decedent would have had at the time of his death.[9]  Because the decedent agreed to arbitrate any claims he had relating to his stay at the defendant nursing facility, this agreement to arbitration applies to the claim for wrongful death brought on behalf of his estate.[10]

However, the court reasons that the claims for loss of consortium brought by the decedent’s adult children are not covered by the arbitration agreement signed by the decedent.[11] The court notes that although plaintiffs could be required to arbitrate loss of consortium claims if they had previously agreed to arbitration, because the plaintiffs here did not personally agree to arbitration, they cannot be compelled to arbitrate their claims.[12] The court in Roth distinguishes the arbitrability of claims based on whether the action is brought on behalf of the estate, or by a third party who was not a signatory to the arbitration agreement.

Endnotes:

[1] United Health Servs. of Ga. v. Norton, 2017 Ga. LEXIS 168.

[2] Norton, 2017 Ga. 168 at 1.

[3] Id. at 6.

[4] Norton v. United Health Services of Georgia, Inc., 336 Ga. App. 51, 54-55 (2016).

[5] Id. at 54 (quoting Pope v. Goodgame, 223 Ga. App. 672, 676 (6) (b) (478 SE2d 636) (1996)).

[6] Norton, 2017 Ga. 168 at 5-6.

[7] Roth v. Evangelical Lutheran Good Samaritan Soc’y, 886 N.W.2d 601 (Iowa 2016).

[8] Id.

[9] Roth, 886 N.W. 2d at 608.

[10] Id.

[11]Roth, 886 N.W. 2d at 613.

[12] Id.