Lead Opinion
Joyce Green contends that U.S. Cash Advance, from which she borrowed money, misstated the loan’s annual percentage rate and so violated the Truth in Lending Act, 15 U.S.C. § 1606. The lender asked the district judge to stay the litigation and direct arbitration under ¶ 17 of the loan agreement:
ARBITRATION: All disputes, claims or controversies between the parties of this Agreement, including all disputes, claims or controversies arising from or relating to this Agreement, no matter by whom or against whom, including the validity of this Agreement and the obligations and scope of the arbitration clause, shall be resolved by binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum. This arbitration agreement is*789 made pursuant to a transaction in interstate commerce, and shall be governed by the Federal Arbitration Act at 9 U.S.C. Section 1. The parties agree and understand that they choose arbitration instead of litigation to resolve disputes. The parties understand that they have a right or opportunity to litigate disputes through a court, but that they prefer to resolve their disputes through arbitration, except as provided herein. THE PARTIES WOULD HAVE HAD A RIGHT OR OPPORTUNITY TO LITIGATE DISPUTES THROUGH A COURT BUT HAVE AGREED TO RESOLVE DISPUTES THROUGH BINDING ARBITRATION, EXCEPT THAT THE TITLE LENDER MAY CHOOSE AT TITLE LENDER’S SOLE OPTION TO SEEK COLLECTION OF PAYMENT(S) DUE IN COURT RATHER THAN THROUGH ARBITRATION. THE PARTIES VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT THEY HAVE TO A JURY TRIAL EITHER PURSUANT TO ARBITRATION UNDER THIS CLAUSE OR PURSUANT TO A COURT ACTION BY TITLE LENDER. The parties agree and understand that all other laws and actions, including, but not limited to, all contract, tort and property disputes will be subject to binding arbitration in accord with this Agreement.
The agreement was signed on May 8, 2012. But the National Arbitration Forum has not been accepting new consumer cases for arbitration since July 2009, when it settled a suit by Minnesota’s Attorney General, who believed that the Forum was biased in merchants’ favor. The lender asked the district court to appoint a substitute arbitrator under 9 U.S.C. § 5. The judge declined, stating that the identity of the Forum as the arbitrator is “an integral part of the agreement”, that 1117 is void, and that the dispute will be resolved on the merits in court.
The district judge’s belief that ¶ 17 requires the arbitration to be conducted by the Forum departs from its language, which says that any dispute “shall be resolved by binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum.” (Emphasis added.) The agreement calls for use of the Forum’s Code of Procedure, not for the Forum itself to conduct the proceedings. If ¶ 17 were designed to require arbitration to be conducted by the Forum exclusively, the reference to its Code would be surplusage; the only reason to refer to the .Code is to create the possibility of arbitration outside the Forum’s auspices, but using its rules of procedure.
Green observes that Rule 1.A of the Code includes this language: “This Code shall be administered only by the National Arbitration Forum or by any entity or individual providing administrative services by agreement with the National Arbitration Forum.” Rule 48.C qualifies this, however: “In the event a court of competent jurisdiction shall find any portion of this Code ... to be in violation of the law or otherwise unenforceable, that portion shall not be effective and the remainder of the Code shall remain effective.” Rule 48.D continues: “If Parties are denied the opportunity to arbitrate a dispute, controversy or Claim before the Forum, the Parties may seek legal and other remedies in accord with applicable law.” One would suppose that 9 U.S.C. § 5 is such an “applicable law.”
Rule 1.A is “unenforceable” in light of the Forum’s decision to cease conducting arbitrations. What’s more, -no author can control how or by whom a written work is
Suppose this is wrong and that an arbitrator is forbidden to use the Forum’s Code of Procedure but must employ different rules. Would that affect the desirability of arbitration, from either a lender’s perspective or a customer’s? If, as the district judge thought, the designation of the Forum (or at least of its Code) is “integral” to the agreement, this implies a belief that the customer, the lender, or both would rather litigate than arbitrate under any other rules or in any other forum. Does that belief have any support? When the Forum stopped accepting arbitrations, did any merchant revise its contracts to eliminate .the arbitration clause? Has any customer insisted on the Forum as a condition of agreeing to arbitration? The- district court did not identify anyone, ever, for whom the answer has been “the National Arbitration Forum or no arbitration at all.”
Two courts of appeals have held that the identity of the Forum as arbitrator is not “integral” to arbitration agreements and that § 5 may be used to appoint a substitute. Khan v. Dell, Inc.,
Ranzy relied on In re Salomon Inc. Shareholders’ Derivative Litigation,
Salomon implemented the parties’ agreement that the chosen arbitrator may rule in favor of litigation. Green wants us to defeat her agreement with the lender— for that agreement conclusively chooses private dispute resolution. We are skeptical of decisions that allow a court to declare a particular aspect of an arbitration clause “integral” and on that account scuttle arbitration itself. Section 5 reads:
If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.
This tells us that arbitration clauses remain enforceable if for “any” reason there is “a lapse in the naming of an arbitrator”. When a court declares that one or another part of an arbitration clause is “integral” and that the clause is therefore unenforceable as a matter of federal common law, it is effectively disagreeing with Congress, which-provided that a judge can appoint an arbitrator when for “any” reason something has gone wrong. Hall Street Associates, L.L.C. v. Mattel, Inc.,
Section 2 of the Arbitration Act could provide a better foundation for an “integral part” escape hatch. Section 2 says that arbitration agreements are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” . This includes all general principles of state law, though not any arbitration-specific doctrines. See, e.g., Marmet Health Care Center, Inc. v. Brown, — U.S.-,
The origin of the “integral part” approach appears to be dictum in Zechman v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
As far as we can tell, no court has ever explained what part of the text or background of the Federal Arbitration Act requires, or even authorizes, such an approach. In recent years the Supreme Court has insisted that the Act not be added to in a way that overrides contracts to resolve disputes by arbitration. American Express Co. v. Italian Colors Restaurant, — U.S. -,
Instead of asking whether one or another feature is “integral,” a court could approach this from a different direction and assume that a reference to an unavailable means of arbitration is equivalent to leaving the issue open. What if an arbitration clause were shorn of details? What if it did not specify how many arbitrators, what forum, or any other administrative matters? Suppose ¶ 17 read, in full: “Any disputes arising out of this contract will be arbitrated.” Could a court then use § 5 to supply particulars? If it could, then it would be hard to see any problem using § 5 in the dispute between Green and U.S. Cash Advance.
The answer is yes. Section 5 applies “if no method be provided” in the contract— that is, if the parties use the sort of detail-free clause we have just imagined. We held in Schulze and Burch Biscuit Co. v. Tree Top, Inc.,
Paragraph 17 makes one thing clear: These parties selected private dispute resolution. Courts should not use uncertainty in just how that would be accomplished to defeat the evident choice. Section 5 allows judges to supply details in order to make arbitration work. The district judge must appoint an arbitrator, who will resolve this dispute using the procedures in the National Arbitration Forum’s Code of Procedure.
Vacated and Remanded
Dissenting Opinion
dissenting.
Despite the surface simplicity of its logic, the majority has actually made an extraordinary effort to rescue the payday lender-defendant from its own folly, or perhaps its own fraud. Because the district court correctly denied the motion to compel arbitration, I respectfully dissent.
Arbitration is at bottom a matter of contract. E.g., American Express Co. v. Italian Colors Restaurant, — U.S.-,
The majority’s reasoning departs from the contractual foundation of arbitration. It puts courts in the business of crafting new arbitration agreements for parties who failed to come to terms regarding the most basic elements of an enforceable arbitration agreement. Section 5 of the Federal Arbitration Act need not and should not be read to' authorize such a wholesale re-write of the parties’ contract. It certainly should not be read to rescue an arbitration clause on behalf of the clause’s author when the author knew or should have known that its designated arbitrator was unavailable. We should instead follow the reasoning and holding of the Second Circuit in In re Salomon Inc. Shareholders’ Derivative Litigation,
To explain these conclusions, Part I reviews the unusual facts underlying this appeal, which appear to be unprecedented in federal appellate cases on section 5. Part II turns to the majority’s principal theory and explains how that theory strays so far from the terms of the parties’ arbitration agreement and from the existing appellate case law. Part III explains the principal flaws in the majority’s broad dictum for salvaging impossibly vague arbitration agreements.
The chronology of this case provides a strong basis for plaintiff Green’s allegations that the parties’ arbitration clause was itself a form of consumer deception and oppression. In 2009, the Minnesota Attorney General sued the National Arbitration Forum for consumer fraud by, among other things, systematically using arbitrators who were biased in favor of businesses in disputes with their consumers. See In re National Arbitration Forum Trade Practices Litig.,
Nearly three years later, on May 8, 2012, Green signed her payday loan with defendant U.S. Cash Advance, providing for arbitration “by and under the Code of Procedure of the National Arbitration Forum.” When U.S. Cash Advance was still providing for arbitration by the Forum in 2012, was it being negligent or deliberately deceptive? Under the majority’s decision, that question will not be answered in this lawsuit. Perhaps it might be answered in the arbitration the majority orders, if Green and her lawyers can afford to go forward at all.
The payday loan agreement that Green signed was certainly a contract of adhesion. Green had no bargaining power over its terms, including the arbitration clause. The idea that she actually agreed, in a subjective sense, to any arbitration clause at all therefore requires some rather heroic assumptions. Under the FAA, though, we must indulge the legal fiction and assume that she read, understood, and embraced defendant’s carefully drafted arbitration clause. Even with that assumption — especially with that assumption — we should affirm the district court’s denial of arbitration.
II. The Mcijority’s Holdings.
A. The Details of the Parties’ Agreement to Arbitrate
The Supreme Court has said repeatedly that we must “ ‘rigorously enforce’ arbitration agreements according to their terms.” American Express,
The key phrase in the arbitration clause says that disputes “shall be resolved by binding arbitration by one arbitrator by and under the Code of Procedure of the
The majority strains the contractual language badly by concluding that the reference to the Forum’s Code would be “surplusage” if the parties meant for arbitration before the Forum to be exclusive, and that “the only reason to refer to the Code is to create the possibility of arbitration outside the Forum’s auspices, but using its rules of procedure.” Op. at 789. The supposed intent is just speculation, and the majority’s reading is highly improbable. The natural reading of the rather simple phrase “by and under the Code of Procedure of the National Arbitration Forum” is that the arbitration will be conducted both by the Forum and according to its rules. The reference to the Forum’s Code of Procedure is there to communicate clearly and remove room for argument, not to allow for the possibility that the Forum might not be available. (Any competent drafter acting in good faith who even considered the possibility the majority embraces surely would have figured out that the Forum was already not available.)
Apart from the majority’s effort to avoid the natural effect of the parties’ contractual language, the exclusivity of the Forum is also found in the requirement of arbitration “under the Code of Procedure of the National Arbitration Forum,” which effectively incorporated the Code into the parties’ agreement. The Code shows in two places the parties’ intent to have only the Forum handle any arbitration.
First, Rule 1(A) states, “This Code shall be administered only by the National Arbitration Forum or by any entity or individual providing administrative services by agreement with the National Arbitration Forum.” We are supposed to enforce the contract according to its terms. The terms of the parties’ contract require application of the Forum Code. The Forum Code requires that it be administered only by the Forum. The majority’s decision here nullifies that requirement and effectively nullifies the parties’ choice.
To avoid this simple logic, the majority uses a feint towards copyright law, which has nothing at all to do with this dispute, to declare Rule 1(A) “unenforceable.” Op. at 789-90. If any branch of intellectual property law is relevant to Rule 1(A), it is trademark law. The Forum’s Rule 1(A), providing that only the Forum and its affiliates can use its Code of Procedure, is designed to protect the Forum’s brand and reputation. The majority is correct that the Forum cannot prevent others from reading or even using its Code of Procedure, with or without adaptations. Copyright law would not help it. But Rule 1(A) was not an empty gesture. The Forum could rely on trademark law to try, at least, to prevent competitors from holding themselves out as substitutes for the Forum itself.
That reading also fits better with the reputation the Forum had built for itself by the time it withdrew from consumer arbitration. The value of its brand lay not in the details of the Code of Procedure but in the strongly pro-business reputation it had built with the many businesses it persuaded to write their form contracts to provide for arbitration of consumer disputes with the Forum. Substitutes would have diluted what was then the valuable
Second, the Forum’s Code also says that if the Forum will not conduct the arbitration itself for some reason, the parties are left to their “legal and other remedies.” Rule 48(D) provides:
The Director or Arbitrator may decline the use of arbitration for any dispute, controversy, Claim, Response or Request that is not a proper or legal subject matter for arbitration or where the agreement of the Parties has substantially modified a material portion of the Code. If Parties are denied the opportunity to arbitrate a dispute, controversy or Claim before the Forum, the Parties may seek legal and other remedies in accord with applicable law.
In other words, the terms of the Forum’s Code, chosen by these parties, repeat that the Code provides for arbitration by the Forum or by nobody. Since the Forum made itself unavailable, that should mean arbitration by nobody. The district court properly denied the motion to compel arbitration.
To avoid Rules 1(A) and 48(D), the majority turns to Rule 48(C), which provides a general severability clause: “In the event a court of competent jurisdiction shall find any portion of this Code ... to be in violation of the law or otherwise unenforceable, that portion shall not be effective and the remainder of the Code shall remain effective.” The majority first explicitly severs the provision in Rule 1(A) that Forum arbitration is arbitration by the Forum, and then severs Rule 48(D), which would send disappointed seekers of arbitration back to the courts. This methodology puts the court in the uncomfortable position of picking and choosing terms that promote arbitration and erasing the ones that do not.
There is in fact no reason to use the severability clause to nullify the important terms providing that Forum arbitration can be provided only under the Forum’s own auspices, with its cohort of trusted arbitrators, or not at all. Given the choice between enforcing Rules 1(A) and 48(D) and not enforcing them, the issue is not the legality of the provisions under copyright law, as the majority seems to think, but the parties’ intentions. Rules 1(A) and 48(D) are both perfectly enforceable between these parties. If courts are in the business of respecting the parties’ agreements, we should enforce them by affirming the parties’ choice of rules, which here required arbitration by the Forum and only the Forum.
B. FAA Section 5 and Relevant Case Law
The majority builds upon the foundation of section 5 of the FAA to order the district court to appoint an arbitrator to whom the parties never agreed, and to do so without any instructions on how to make an appropriate selection. This part of the majority’s opinion not only chooses the wrong side in a circuit split, but also uses reasoning that no other circuit has adopted to go farther to rescue a more deeply flawed arbitration agreement than any other circuit has.
Section 5 provides, with added numbering of the key conditional phrases:
[1] If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but [2] if no method be provided therein, or [3] if a method be provided and any party thereto shall fail to avail himself of such method, or [4] if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application' of either party to the controversy the court shall designate*797 and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.
9 U.S.C.A. § 5. To parse the possibilities, the first conditional phrase does not apply here because the agreement provided a method for naming an arbitrator, but it cannot be followed because of the Forum’s withdrawal from consumer arbitration. The second phrase does not apply because a selection method was provided. The third phrase — “if a method be provided and any party thereto shall fail to avail himself of such method” — also does not apply. A method was provided, but no party failed to avail itself or herself of the method. The fourth phrase is the residual possibility: “if for any other reason there shall be a lapse in the naming of an arbitrator. ...”
I agree with the majority that we must assume that the parties’ arbitration agreement was drafted against the background of the FAA, which we should also deem incorporated into the agreement. Whether section 5 authorizes the majority’s approach depends on what counts as a lapse. That issue has divided a few circuits, but no circuit has gone as far as the majority goes here, finding a correctable lapse where a drafter has at least negligently named an arbitration forum that was never available.
The majority and the cases it relies upon disagree with the Second Circuit’s decision in In re Salomon Inc. Shareholders’ Derivative Litigation,
The district court denied the request, and the Second Circuit affirmed. In logic that fits this case to a T, the Second Circuit explained:
[Ujnder the arbitration agreements, all disputes were to be arbitrated by the NYSE and only the NYSE, “in accordance with the [NYSE] Constitution and rules.” The NYSE Constitution clearly permits the NYSE to refuse the use of its facilities for the arbitration of any particular dispute. NYSE Const. Art. XI, § 3. When the NYSE so refuses, there is no further promise to arbitrate in another forum.
Salomon,
The majority tries to distinguish this case- from Salomon on two grounds. Neither stands up to scrutiny. First, the majority says that the agreements in Salomon provided for arbitration exclusively before the NYSE and that the parties’ choice here was not exclusive. In fact, the arbitration agreements in both cases did not use the word “exclusive” to designate the chosen forum, but that was the meaning of both. That was how the Second Circuit interpreted the agreements in Salomon. See
On the other side, the majority’s best ease is the majority opinion in Khan v. Dell, Inc.,
But even if Khan were correct on its own terms, it should not extend to the facts of this case. In Khan, the parties entered into their contract for Forum arbitration back in 2004, when the Forum was actually available. See
The other cases the majority cites for support add little to Khan. In Reddam v. KPMG, LLP,
The Eleventh Circuit’s decision in Brown v. ITT Consumer Financial Corp.,
Thus we should follow Salomon and affirm. The majority errs by choosing instead the less persuasive side of a circuit split and then taking the logic of that weaker side even farther than any circuit court has gone to date, rescuing an arbitration agreement that was fatally flawed from the very beginning.
III. The Majority’s Broad Dictum
The majority concludes -with a broad and mistaken dictum. The introduction to the dictum is the majority’s criticism of the non-statutory “integral” test for deciding when to exercise section 5 power, which was used in the very cases the majority relies upon, such as Khan and Reddam. I agree, by the way, with the majority’s criticism of that non-statutory test. The sounder method is simply to examine the relevant texts to determine whether the contractual selection of an arbitrator was exclusive or not. Here it was. See Forum Rule 1(A). But the majority then offers its new solution by supposing that a contract said merely: “Any disputes arising out of this contract will be arbitrated.” Would that be enough to invoke section 5 to have a district court fill in all the additional details? The majority says yes, but has no direct case support for that answer. The limited language of section 5 and the contract-based logic of the Supreme Court’s interpretation of the FAA point toward no.
Before looking at the case law, consider the many terms that are material in even a
The best support for the majority’s dictum is Schulze and Burch Biscuit Co. v. Tree Top, Inc.,
The other cases cited by the majority on this point involved stand-offs in the selection procedures for an arbitrator, which are the target of section 5, see Bethlehem Mines Corp. v. United Mine Workers of America,
We should not read section 5 of the FAA to allow or require courts to decide all of the basic questions about arbitration. The designation of an arbitration forum “has wide-ranging substantive implications that may affect, inter alia, the arbitrator-selection process, the law, procedures, and rules that govern the arbitration, the enforcement of the arbitral award, and the cost of the arbitration.” Grant v. Magnolia Manor-Greenwood, Inc.,
IV. Conclusion
Since the case is going back to the district court, it is worth pointing out just how much freedom the majority’s approach leaves the district judge in appointing an arbitrator. The Forum’s Code of
Notes
. The district court opinion in the MDL case provides a good deal of helpful background information on the Forum, including the results of Congressional hearings, described as "rather shocking” by Judge Magnuson.
. In Ranzy v. Tijerina,
. The majority makes perhaps its longest stretch in claiming its decision is consistent with an implicit assumption in the Supreme Court’s decision in CompuCredit Corp. v. Greenwood,-U.S.-,