Lead Opinion
OPINION
This appeal involves a matter of first impression for this Circuit — whether Sec
I. Factual Background
Dell designed, manufactured, and distributed the 600m computer from 2003 to 2006. Khan purchased a Dell 600m computer in September 2004 for approximately $1,200. Khan purchased the computer online through Dell’s website, www.Dell.com. To complete the purchase, Khan was required to click a box stating “I AGREE to Dell’s Terms and Conditions of Sale.” Just beneath the box was a notice stating:
The Terms and Conditions of Sale contain very important information about your rights and obligations as well as limitations and exclusions that apply to you. They contain limitations of liability and warranty information. They also contain an agreement to resolve disputes through arbitration, rather than through litigation. Please read them carefully.
As Dell’s notice indicated, its Terms and Conditions of Sale contained an arbitration provision that reads as follows:
13. Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY (WHETHER IN CONTRACT, TORT, OR OTHERWISE, WHETHER PREEXISTING, PRESENT OR FUTURE, AND INCLUDING STATUTORY, COMMON LAW, INTENTIONAL TORT AND EQUITABLE CLAIMS) BETWEEN CUSTOMER AND DELL, its agents, employees, principals, successors, assigns, affiliates (collectively for purposes of this paragraph, “Dell”) arising from or relating to this Agreement, its interpretation, or the breach, termination or validity thereof, the relationships which result from this Agreement (including, to the full extent permitted by applicable law, relationships with third parties who are not signatories to this Agreement), Dell’s advertising, or any related purchase SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) under its Code of Procedure then in effect (available via the Internet at http://www.arb-forum.com, or via telephone at 1-800-474-2371). The arbitration will be limited solely to the dispute or controversy between customer and Dell. NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATE CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY. This transaction involves interstate commerce, and this provision shall be governed by the Federal Arbitration Act 9 U.S.C. sec. 1-16(FAA). Any award of the arbitrators shall be final and binding on each of the parties .... Information may be obtained and claims may be filed with the NAF at P.O. Box 50191, Minneapolis, MN 55405.
In addition, the Terms and Conditions provided that Texas law would govern interpretation of the Agreement and of any sales. The Terms and Conditions did not contain a severance provision and any alterations to the Terms and Conditions required the signature of both parties.
Khan alleged that his 600m suffered from design defects, causing his computer to overheat and thereby destroy the computer’s motherboard. Khan replaced the motherboard multiple times. After the third replacement, Dell refused to issue another replacement, claiming the warranty had expired. The 600m allegedly suffered from other design defects, which prevented it from being used in a manner consistent with Dell’s marketing.
On July 24, 2009, Khan filed a putative consumer class action on behalf of himself and other similarly situated purchasers and lessees of defectively designed 600m computers sold from approximately 2003 through 2006. Khan asserted seven claims for (1) violations of the New Jersey Consumer Fraud Act, (2) breach of express warranty, (3) breach of implied warranty of merchantability or fitness for particular purpose, (4) fraud, (5) negligent misrepresentation, (6) breach of implied covenant of good faith and fair dealing, and (7) unjust enrichment. At the time the lawsuit was filed, the NAF had been barred from conducting consumer arbitrations by Consent Judgment, which resolved litigation brought by the Attorney General of Minnesota.
According to Khan, such practices included:
(1) representing to consumers and the public that it was neutral;
(2) convincing credit card companies and other creditors to include exclusive arbitration forum provisions in their contracts and making representations to such entities that it would favor the entities in the arbitrations; and
(3) identifying and appointing anti-consumer arbitrators and withholding referrals to arbitrators who decided cases against companies.
Khan also alleged that the Minnesota investigations found that these practices encouraged some corporations to select the NAF as their arbitration forum because of this prospect of favorable results. However, although Khan suggested that Dell must have chosen the NAF based on its
On October 2, 2009, Dell moved to compel arbitration, arguing that the arbitration provision was binding and covered all of Khan’s claims. Khan did not dispute that the Terms and Conditions governed the contract. Khan did, however, assert that the arbitration provision was unenforceable because the NAF, which the arbitration provision designated as the arbitral forum, was no longer permitted to conduct consumer arbitrations. Khan further contended that the NAF’s designation was integral to the arbitration provision. He argued, for that reason, that, because the NAF could not perform its function, the arbitration provision in the Terms and Conditions should not be enforced and the parties should proceed to litigation.
On August 18, 2010, the District Court denied Dell’s motion to compel arbitration and stay claims. See Khan v. Dell, Inc., No. 09-3703(JAP),
II. Jurisdiction and Standard of Review
A district court decides a motion to compel arbitration under the same standard it applies to a motion for summary judgment. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd.,
III. Analysis
In this appeal, we must determine whether the provision in the Terms and Conditions that the NAF be the arbitrator is exclusive to the NAF and is an integral
The particular problem presented in this case — the unavailability of the NAF — is addressed in section 5 of the FAA, which provides a mechanism for substituting an arbitrator when the designated arbitrator is unavailable.
According to Khan, this standard has been met because the Terms and Conditions designate the NAF as the exclusive
In our view, this language is ambiguous: “EXCLUSIVELY’ could be read to modify “BINDING ARBITRATION,” “THE NATIONAL ARBITRATION FORUM,” or both.
Khan, however, points out that the NAF’s rules are incorporated into the contract, and that these rules provide that all arbitrations must be conducted by the NAF or an entity having an agreement with it. We conclude, however, that this requirement is also ambiguous as to what should happen in the event that the NAF is unavailable. The NAF’s rules provide that they shall be interpreted in a manner consistent with the FAA and that, if any portion of the NAF rules are found to be unenforceable, that portion shall be severed and the remainder of the rules shall continue to apply.
Our finding of ambiguity is confirmed by the conflicting interpretations of this language adopted by the courts that have considered it.
The court in Brown supports Dell’s position that “exclusively” modifies “binding arbitration.” The arbitration agreement in Brown was interpreted as demonstrating an intent to arbitrate that trumped the designation of a particular arbitrator who was no longer available. In Brown, a former ITT employee argued that the arbitration clause between the parties — which was virtually identical to the clause here— was void because the NAF had been dissolved. Id. at 1220, 1222. The Eleventh Circuit found that the unavailability of the NAF did not destroy the arbitration clause because Section 5 of the FAA provided a mechanism for appointing a replacement arbitrator. Id. at 1222. The court did note the “integral” exception but found that there was no evidence supporting the employee’s claim that the forum provision was integral to the arbitration clause. Id.
Adler v. Dell, Inc.,
On the other hand, in Carideo v. Dell, Inc., No. C06-1772JLR,
Although courts are divided on the issue, we conclude that the “liberal federal policy in favor of arbitration” counsels us to favor the Brown line of cases. The language relied on by Khan is at best ambiguous as to whether the parties intended to have their disputes .arbitrated in the event that NAF was unavailable for any reason. Because of the ambiguity, it is not clear whether the designation of NAF is ancillary or is as important a consideration as the agreement to arbitrate itself. See Brown,
We note moreover that the arbitration provision in the Terms and Conditions specifically incorporated the FAA, 9 U.S.C. §§ 1-16, suggesting that, in the event of the NAF’s unavailability, the FAA’s procedures for addressing such a problem should apply. Finally, we note the notice, provided to Khan when he accepted the Terms and Conditions, which stated that they “contain an agreement to resolve disputes through arbitration, rather than through litigation.”
Khan, however, argues that, even if the NAF’s designation as the arbitral forum was not integral to the Terms and Conditions, Section 5 of the FAA nevertheless did not apply here because NAF’s unavailability was not a “lapse” within the meaning of statute. In support of this argument, Khan cites In re Salomon Inc. S’holders’ Derivative Litig.,
We find In re Salomon unpersuasive. First, we do not see why the NAF’s unavailability is not a “mechanical breakdown in the arbitrator selection process.” Apparently, the NAF’s Consent Judgment with the State of Minnesota prevents it from acting as an arbitrator. This unavailability appears to us to be a breakdown in the mechanics of the appointment process. To take a narrower construction of Section 5 would be inconsistent with the “liberal federal policy in favor of arbitration” articulated in the FAA.
We conclude therefore that the unavailability of NAF to hear the disputes between
IV. Conclusion
The contract’s language does not indicate the parties’ unambiguous intent not to arbitrate their disputes if NAF is unavailable. Section 5 of the FAA requires a court to address such unavailability by appointing a substitute arbitrator. The District Court’s contrary conclusion is at odds with the fundamental presumption in favor of arbitration. We will therefore vacate the judgment of the District Court and remand this case for further proceedings consistent with this opinion.
Notes
. See generally “ ‘Arbitration’ or ‘Arbitrary’: The Misuse of Mandatory Arbitration to Collect Consumer Debts" Before the Subcomm. on Domestic Policy, Oversight and Government Reform Comm. 3-5 (2009) (statement of Minnesota Attorney General Lori Swanson), http://oversight.house.gov/images/stories/ Hearings/pdfs/20090722Swanson.pdf (recounting Minnesota Attorney General’s findings).
. Section 5 provides:
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.
. Because the District Court denied Dell’s motion to compel arbitration, it did not address Khan’s alternative argument that the arbitration provision in the contract is unconscionable. We leave it to the District Court to address this argument on remand.
Dissenting Opinion
dissenting.
The majority opinion acknowledges that the Supreme Court has stated the “fundamental principle that arbitration is a matter of contract,” Rent-A-Center, West, Inc. v. Jackson, — U.S.-,
The plain text of the arbitration agreement clearly states that the selection by Dell of the NAF as arbitrator was integral to the agreement, and leads me to conclude that Section 5 of the FAA is inapplicable and the unavailability of the NAF precludes arbitration.
The arbitration clause in Dell’s Terms and Conditions of Sale states:
13. Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY (WHETHER IN CONTRACT, TORT, OR OTHERWISE, WHETHER PREEXISTING, PRESENT OR FUTURE, AND INCLUDING STATUTORY, COMMON LAW, INTENTIONAL TORT AND EQUITABLE CLAIMS) BETWEEN CUSTOMER AND DELL, its agents, employees, principals, successors, assigns, affiliates, (collectively for purposes of this paragraph, “Dell”) arising from or relating to this Agreement, its interpretation, or the breach, termination or validity thereof, the relationships which resulted from this Agreement (including, to the full extent permitted by applicable law, relationship with third parties who are not signatories to this Agreement), Dell’s advertising, or any related purchase SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) under its Code of Procedure then in effect (available via the Internet at http://www.arbforum.com, or via telephone at 1-800-474-2371). The arbitration shall be limited solely to the dispute or controversy between customer and Dell. NEITHER CUSTOMER NOR DELL SHALL CONSOLIDATE CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY. This transaction involves interstate commerce, and this provision shall be governed by the Federal Arbitration Act, 9 U.S.C. sec. 1-16(FAA). Any award of the arbitrator shall be final and binding on both of the parties.... Information may be obtained and claims may be*358 filed with the NAF at P.O. Box 50191, Minneapolis, MN 55404.
App. at A67.
The majority reasons that this language is “ambiguous” because “ ‘EXCLUSIVELY’ could be read to modify ‘BINDING ARBITRATION,’ ‘THE NATIONAL ARBITRATION FORUM,’ or both,” see Majority Opinion supra page 355, and that the “liberal federal policy in favor of arbitration” thus compels the court to resolve this “ambiguity” in favor of arbitration. See Majority Opinion supra page 356. However, “the FAA’s proarbitration policy does not operate without regard to the wishes of the contracting parties.” Mastrobuono v. Shearson Lehman Hutton, Inc.,
The phrase “EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTRATED BY THE NATIONAL ARBITRATION FORUM” is written in all capital letters yet surrounded by clauses written in lower case letters. This aesthetic prominence indicates the parties’ intent for the entire phrase to be read together and emphasized as an essential part of the agreement. Moreover, as noted by the District Court, “[t]he NAF is expressly named, the NAF’s rules are to apply, ... no provision is made for an alternate arbitrator [, and the] language used is mandatory, not permissive.” App. at A12. The agreement also states that “[information may be obtained and claims may be filed with the NAF at P.O. Box 50191, Minneapolis, MN 55404,” again illustrating the central role that NAF was intended to play in arbitrations pursuant to this agreement.
Given “the consensual nature of private dispute resolution,” courts must respect the principle that “parties are generally free to structure their arbitration agreements as they see fit.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., — U.S.-,
There is yet another reason why Dell’s request to proceed via arbitration rather than trial should not be granted, and that reason applies to this defendant in this case. The majority avoids any discussion of the underlying reason why arbitration by NAF is unavailable. In an action pending in Minnesota, the Minnesota Attorney General made public the results of its year-long investigation that showed that NAF, far from being the neutral arbitration forum contemplated by Congress when it enacted the Federal Arbitration Act, represented to corporations that it would appoint anti-consumer arbitrators and discontinue referrals to arbitrators who decided cases in favor of consumers. See Amicus Curiae Br. at 8, 13-15; see also Arbitration or ‘Arbitrary”: The Misuse of Mandatory Arbitration to Collect Consumer Debts: Hearing Before the H. Domestic Policy Subcomm. of Comm. on Oversight and Gov’t Reform, 111th Cong. (July 22, 2009).
Rather than disputing the allegations, NAF accepted a consent judgment that barred it from administering and participating in all consumer arbitrations. See