When Must a Dispute Be Submitted to Arbitration? Who Makes the Call?, Part I
Part one of this article deals with the questions of when an arbitration agreement is enforceable. Part two will discuss whether the answer to that question is to be determined by a court or an arbitration panel.
A prospective plaintiff may approach an attorney with an apparently meritorious case, one with considerable jury appeal. As an added attraction, there may be no federal question, which means it will remain in state court where it is less endangered by the threat of a dispositive motion. The rub is that the claimant and the opposing party have signed an agreement to arbitrate future disputes with each other. It is possible that the claimant does not understand the consequences of having signed the agreement. When aware of the presence of an arbitration agreement, the attorney may determine that there is potentially a basis for defeating the requirement to arbitrate. At some point counsel will have to decide whether to file a judicial action hoping to bypass arbitration or make a demand for arbitration.1
If a judicial action is filed, defense counsel will have to decide whether to move to have the matter remanded for arbitration. Counsel for both parties will have to determine on what bases the arbitration agreement might be found unenforceable and whether the court has jurisdiction to make the decision on enforceability, or if the decision is within the province of an arbitrator selected by the parties.
Not All Arbitration Clauses Will Be Enforced by Courts
The Federal Arbitration Act (FAA) authorizes the enforcement of pre-dispute written agreements to arbitrate controversies except “upon such grounds as exist at law or in equity for the revocation of any contract.”2 The defense in 9 U.S.C. §2 to a requirement to arbitrate based on contract law is often referred to as the saving clause. Frequently, a party trying to avoid arbitration will argue that an exception in the saving clause is applicable to a given controversy.
In determining whether a controversy is subject to mandatory arbitration, the principle stated in Moses H. Cone Memorial Hosp. v. Mercury Constr., 460 U.S. 1, 24-25 (1983) (footnote omitted) must be applied.
The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the language itself or an allegation of waiver, delay, or a like defense to arbitrability.3
Courts take into account that the FAA was enacted “to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate.”4 In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), the court stated, “[§]2 embodies the national policy favoring arbitration and places arbitration agreements on equal footing with other contracts.”
Grounds “At Law or in Equity”
• Unconscionability — In Doctor’s Associates, Inc. v. Casarotto, 517 U.S 681, 687 (1996) (citations omitted), the Supreme Court ruled that “generally applicable contract defenses, such as fraud , duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening Section(s) 2 [of the FAA].” “The issue of ‘whether a valid written agreement to arbitrate exists’ is controlled by principles of state contract law.”5
Section 2 of the FAA requires enforcement of arbitration agreements except on the same grounds that would be the basis for denying enforcement of “any contract.” In determining the enforceability of an arbitration agreement, courts may not consider state laws that treat arbitration agreements differently from other contracts. “[C]ourts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.”6 In Casarotto, a Montana statute mandating that contracts requiring arbitration give notice of that fact on the first page, typed in underlined capital letters, was incompatible with and, therefore, preempted by the FAA. Accordingly, the arbitration requirement in a contract requiring the arbitration of disputes was enforced, although it lacked the language required by the state statute.
• Procedural Unconscionability — The components of procedural unconscionability under Florida law were considered in Pendergast v. Sprint Nextel Corporation, 592 F.3d 1119, 1135 (11th Cir. 2010) (citations and quotation marks in original):
To determine whether a contract is procedurally unconscionable under Florida law, courts must look to: (1) the manner in which the contract was entered into; (2) the relative bargaining power of the parties and whether the complaining party had a meaningful choice at the time the contract was entered into; (3) whether the terms were merely presented on a “take-it-or-leave-it” basis; and (4) the complaining party’s ability and opportunity to understand the disputed terms of the contract. Powertel , 743 So. 2d at 574; Murphy , 944 So. 2d at 1134. Under Florida law, a central question in the procedural unconscionability analysis is whether the consumer has an absence of meaningful choice in whether to accept the contract terms. Belcher , 558 So. at 1042. In addition, Florida courts “might find that a contract is procedurally unconscionable if important terms were hidden in a maze of fine print and minimized by deceptive sales practices.” Powertel , 743 So. 2d at 574.
An arbitration provision in a nursing home agreement was found to be procedurally unconscionable in Woebse v. Health Care and Retirement Corporation of America, 977 So. 2d 630 (Fla. 2d DCA 2008), when the daughter of the resident, who signed on his behalf, was given only a five-minute meeting in which to review a 37-page document. The arbitration provision, which was not highlighted, was buried within the document and it was not pointed out to her nor was she provided with a copy of the agreement to give her an opportunity to review it after the meeting. The court also considered that there was a lack of equal bargaining power because she was not told she did not have to sign the document for her father to remain in the nursing home.7
When the weaker party spoke only Spanish and the contract was in English the arbitration requirement in an automobile purchase agreement was found to be procedurally unconscionable in Hialeah Automotive, LLC v. Basulto, 22 So. 3d 586 (Fla. 3d DCA 2009) .
No procedural unconscionability was found in a nursing home agreement in Bland, ex rel. Coker v. Health Care and Retirement Corporation of America, 927 So. 2d 252 (Fla. 2d DCA 2006), in which the arbitration agreement was a separate document and the admissions director spent two hours explaining the document to the signer. Although the court did not find procedural unconscionability in Shotts v. OP Winter Haven, Inc., 86 So. 3d 456, 464, 471 (Fla. 2011),
it suggested that failure of the document to fully disclose the detriments to the nursing home resident in the arbitration could result in substantive unconscionability. The court further noted that even when ample time is given to review the document, the signatory to the agreement may be under time constraints and circumstances that “do not lend themselves to the natural creation of a level playing field.”8
The failure of a party to an agreement containing an arbitration clause to read the document will not excuse the individual from arbitrating a dispute arising under the agreement. “[A] party to a contract is not ‘…permitted to avoid the consequences of a contract freely entered into simply because he or she elected not to read and understand its terms before executing it or because in retrospect, the bargain turns out to be disadvantageous.’”9
• Substantive Unconscionability —Some courts have held that before an arbitration agreement will be found unenforceable as unconscionable, there must be both procedural and substantive unconscionability.10 The court in Woebse stated that “[a] substantively unconscionable contract is one that ‘no man in his senses and not under delusion would make on one hand and no honest and fair man would accept on the other.’”11 In Gainesville Health Care Center, Inc. v. Weston, 857 So. 2d 278, 284-85 (Fla. 1st DCA 2003) (citation omitted), the court observed that “to determine whether a contract is substantively unconscionable, a court must look to the terms of the contract, itself, and determine whether they are so ‘outrageously unfair’ as to ‘shock the judicial conscience.’”
The court in Armendariz v. Foundation Health Psychcare Services, 99 Cal. Rptr. 2d 767 (Cal. 2000), also found that both procedural and substantive unconscionability are required before an arbitration agreement will be ruled unenforceable. The court opined that a sliding scale should be applied to its determination. When harsher or more unreasonable substantive provisions are present, less procedural unconscionability is required. In Basulto, the author of the opinion, Judge Cope, expressed his personal view that the requirement of both procedural and substantive unconscionability should be reconsidered.12
In Romano v. Manor Care, Inc., 861 So. 2d 59 (Fla. 4th DCA 2003), an arbitration agreement was found to be substantively unconscionable when it did not permit the recovery of punitive damages by a nursing home resident even though the Florida Nursing Home and Related Health Care Facilities Act, F.S. Ch. 400, authorized punitive damages. The court reasoned, “Although parties may agree to arbitrate statutory claims, even ones involving important social policies, arbitration must provide the prospective litigant with an effective way to vindicate his or her statutory cause of action in the arbitral forum.”13
In Basulto, an arbitration agreement was found to be substantively unconscionable when it deprived a plaintiff from recovering punitive damages in a fraud claim as permitted by F.S. §768.72. The court found “that it is unconscionable to employ an arbitration agreement to obtain a waiver of rights to which the signatory would otherwise be entitled under common law or statutory law.”14
In Powertel, Inc. v. Bexley, 743 So. 2d 570 (Fla. 1st DCA 1999), an arbitration agreement was held to be unconscionable when it required the customer to waive statutory rights to injunctive and declaratory relief provided in the Florida Deceptive and Unfair Practices Act (FDUTPA).15 The court found that the waiver would defeat the remedial purpose of the statute.16
The Supreme Court in AT&T Mobility v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740 (2011), reversed a California Supreme Court ruling that found a class action waiver was unconscionable under California law. The Court held that the FAA preempted California law.17 The Court commented, “Although §2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law that stands as an obstacle to the accomplishment of the FAA’s directives.”18
Arbitration Agreements Denied Enforcement When Unconscionability Is Not Discussed
In many cases dealing with the enforceability of arbitration agreements, issues of the propriety of requiring arbitration due to the harshness of the agreement are not phrased in terms of unconscionability.
The 11th Circuit, in Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054, 1060 (11th Cir. 1998), declined to require a plaintiff to arbitrate a statutory employment discrimination claim when the arbitration agreement restricted the arbitrator to awarding damages for breach of contract. The court found the arbitration clause to be “woefully deficient” as this limitation would preclude the plaintiff from obtaining the full relief allowed in statutory claims, such as those under Title VII of the 1964 Civil Rights Act. The court further reasoned that the arbitration agreement did not adequately inform the plaintiff, who did not have the sophistication to interpret legal documents, that statutory claims were required to be arbitrated.
In Hooters of America, Inc. v. Phillips, 173 F.3d 933, 935 (4th Cir. 1999), the court ruled that Hooters’ employee dispute resolution procedure was “utterly lacking in the rudiments of even-handedness.” The one-sided arbitration agreement gave broad discretion to the employer in determining the pool from which arbitrators could be selected, and required the employee to be specific in providing details of the claim at the outset while the employer was not required to file a responsive pleading. The employee was required to file a witness list with a summary of each witness’ testimony with the claim, while no such burden was placed on the employer. The employer was allowed to record the proceeding while the employee was not. The court described the process as “a sham system unworthy of even the name of arbitration.”19
A party’s objection to proceeding to arbitration because of the excessive cost does not per se preclude enforcement of an arbitration provision. The party protesting sharing the cost has the burden of proving the likelihood of incurring such costs.20
In American Express Company v. Italian Colors Restaurant, 570 U.S. ___, No. 12-133 (2013), the Supreme Court found that a waiver in an arbitration agreement of the right to pursue a class remedy was enforceable. The Court rejected the argument of the prospective class plaintiffs that the expense of bringing individual arbitrations of their anti-trust claims was too expensive to permit them to vindicate their rights.
Courts have, in some cases, scrutinized the availability of discovery procedure in passing on the enforceability of agreements to arbitrate. The Supreme Court commented in Gilmer v. Interstate/Johnson Lane Corporation, 500 U.S. 20, 31 (1991) (citation omitted), that although discovery procedures “might not be as extensive as in the federal courts, a party ‘trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.’”
The Ninth Circuit considered an arbitration agreement between an employer and an employee in Ferguson v. Countrywide Credit Industries, Inc., 298 F.3d 778 (9th Cir. 2002), in which the arbitration agreement limited the deposition of a corporate representative to no more than “four designated subjects.” Each party was limited to 30 discovery requests. The discovery limitations were found not to be unconscionable standing alone, but considered in connection with other factors favoring the employer, the agreement’s limitations as a whole were unconscionably one-sided. The agreement’s limitations restricted the ability of the employee to support a claim.21
Disputes not Covered by the Parties Arbitration Agreement
It is fundamental that the duty to arbitrate is a matter of contract.22 No party may be compelled to submit to arbitration a dispute that the party has not agreed to arbitrate.23 An arbitration agreement will be enforced only to cover a dispute within the scope of the agreement.
In Seifert v. U.S. Home Corporation, 750 So. 2d 633 (1999), the arbitration clause in a residential construction contract did not require the customer to arbitrate a wrongful death action against the builder. The plaintiff’s decedent died when carbon monoxide from a car left running in the garage entered the house through ducts leading from the garage. The arbitration agreement in the parties’ contract covered “[a]ny controversy or claim arising under or related to this [a]greement or the [p]roperty.” The court reasoned that the claim was a tort action that did not arise out of any warranty in the parties’ contract.
In Seaboard Coast Line Railroad Company v. Trailer Train Company, 690 F.2d 1343 (11th Cir. 1982), the parties’ contract contained an arbitration clause requiring that the resolution of “[a]ny difference or dispute hereunder which cannot be settled by agreement between Carrier and Trailer Train shall be submitted to two arbitrators.” This language was found inapplicable to a subsequent dispute over the failure of Trailer Train to provide paperwork necessary for Seaboard to obtain a tax refund. The court found that the language did not encompass all aspects of the agreement.
Contracts Lacking in Mutuality
In R.W. Roberts Construction Co. v. St. Johns River Water Management Dist. Elec. for Use and Benefit of McDonald Elec. , 423 So. 2d 630 (Fla. 5th DCA 1982), the court found arbitration was not required due to lack of mutuality of consideration. The contract was for electrical work to be performed by a subcontractor who was the only party to the contract required to arbitrate disputes. The general contractor was not so bound. The court held that there was consideration to support the parties’ basic contract but not to support the arbitration agreement. The court reasoned, “[a]greements for arbitration contained in a contract are treated as separable parts of the contract.”24
The parties’ mutual promises to arbitrate were held to be adequate consideration to support an enforceable agreement in Adkins v. Labor Ready, Inc., 303 F.3d 496, 501 (4th Cir. 2002). However, when only the employee was bound to arbitrate employment disagreements,25 The court held that the agreement was not enforceable. Mutuality of consideration was lacking when the employer was not bound to arbitrate disputes between the parties.
The Court of Appeals of Maryland in Cheek v. United Healthcare of the Mid-Atlantic, Inc., 835 A.2d 656 (Md. 2003), found that an arbitration policy that permitted an employer to “alter, amend, modify, or revoke the policy at its sole discretion at any time with or without notice” was unenforceable for lack of consideration. The employer’s promise to arbitrate was rendered illusory by its ability to change the rules at any time. The court further found that the arbitration policy was severable from the underlying employment agreement. Thus, the consideration supporting the employment agreement did not support the agreement to arbitrate.26
Arbitration Agreements that Are Void as a Matter of Public Policy
The decisions in Romano and Blankenfeld v. Richmond Health Care, Inc., 902 So. 2d 296, 298 (Fla. 4th DCA 2005), found arbitration agreements limiting remedies in nursing home arbitration agreements to be unconscionable as they barred remedies available under the Nursing Home Resident’s Rights Act.27 In Shotts, the court examined such limitations differently finding that, in an arbitration agreement, those restrictions of remedies violated Florida’s public policy. The court stated in Shotts that “ the limitations of remedies provisions in the present case violate public policy, for they directly undermine specific statutory remedies created by the [l]egislature.”28 The court declined to sever the contested language from the agreement on the basis of the document’s severability clause finding that severance would require the court to rewrite the contract.29
The issue of whether an arbitration agreement violates public policy is separate from the issue of whether it is unconscionable.30 The Florida Supreme Court has held that “[n]o valid arbitration agreement exists if the arbitration clause is unenforceable on public policy grounds.”31
In Fonte v. AT&T Wireless, 903 So. 2d 1021, 1023 (Fla. 4th DCA 2005), the court declined to find an arbitration agreement unconscionable, but it found the waiver of the statutory right to attorneys’ fees allowed under FDUTPA to be void because it would defeat a remedial purpose of the statute. The court allowed the arbitration to proceed after removing the ban against attorneys’ fee recovery, pursuant to the agreement’s severance clause. In Blankenfeld,
the court opined that a nursing home agreement requiring proof of punitive damages by “clear and convincing evidence” would be void as contrary to public policy when the Nursing Home Care Act32 merely requires proof by a “preponderance of the evidence.”33
In Country Preferred Insurance Company v. Whitehead, 979 N.E.2d 35 (Ill. 2012), the Illinois Supreme Court held that an automobile policy requiring that a demand for arbitration under the uninsured motorist provision be filed within two years of the occurrence of the incident on which the claim was based did not violate Illinois public policy when there was a three-year limitation for filing personal injury claims in the state where the accident occurred.
Arbitration Agreements Not Covered by the FAA
The FAA does not govern all agreements to arbitrate.34 The FAA, in 9 U.S.C. §2 allows for the enforcement of written provisions “in any maritime transaction or a transaction involving commerce.” However, FAA §1 (emphasis added) excludes from coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. ”
The Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), held that the exclusion of the contracts of seamen, railroad employees, and other workers “engaged in foreign or interstate commerce” did not generally refer to employment contracts. Thus, arbitration agreements in employment agreements are enforceable under the FAA. Circuit City limited the exclusion in §2 to contracts involving transportation workers.35
Applying the principle of ejusdem generis, the Court in Circuit City reasoned that “where general words follow specific words in statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words.”36 Thus, the words “any other class of workers engaged in foreign or interstate commerce” are limited in meaning to seamen and railroad employees.
The Court further found that Congress’ use of the term “engaged in commerce” as it did in §1 should be afforded a narrow construction rather than an interpretation that Congress is asserting the full breadth of its commerce power.37
1 In determining in which court to file an action relating to an arbitration agreement, the fact that the Arbitration Act, 9 U.S.C. §1, et seq. (FAA),
does not by itself confer jurisdiction on a federal court to hear controversies covered by that statute must be considered. An independent basis, such as diversity of the parties or the presence of a federal question, is necessary to confer federal court jurisdiction. Vaden v. Discover Bank, 556 U.S. 49, 66 (2009); Hall Street Associates, LLC v. Mattell, Inc., 552 U.S. 582 (2008) (citing Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1, 25, n. 32 (1983)).
2 9 U.S.C. §2.
3 See also AT&T Technologies, Inc. v. Communications Workers of America, 476 U.S. 643, 650 (1986); United Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582-83 (1960) (“[I]t has been established that where the contract contains an arbitration clause, there is a presumption of arbitrability in the sense that ‘[a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.’”).
4 Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219-20 (1985).
5 Shotts v. OP Winter Haven, Inc., 86 So. 3d 456, 464, 471 (Fla. 2011). See also Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis is in the original) (“The issue of state law, whether of legislative, or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.”).
6 AT&T Mobility v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740, 1745 (2011) (internal citations omitted).
7 Woebse, 977 So. 2d at 634.
8 Shotts, 86 So. 3d at 470-71.
9 Murphy v. Courtesy Ford, LLC, 944 So. 2d 1131, 1134 (Fla. 3d DCA 2006) (quoting Gainesville Health Care Center, Inc. v Weston, 857 So. 2d 278, 288 (Fla. 1st DCA 2003)).
10 Id.; Powertel, Inc. v. Bexley, 743 So. 2d 570, 574 (Fla. 1st DCA 1999); Hume v. United States, 132 U.S. 406, 411 (1889).
11 Woebse, 977 So. 2d at 632.
12 Basulto, 22 So. 3d at 586, 592, n. 4.
13 Romano, 861 So. 2d at 62. See also Woebse, 977 So. 2d 630, which followed the reasoning of Romano in declining enforcement of a similar agreement.
14 Basulto, 22 So. 3d at 590.
15 Fla. Stat. §501.202(2)
16 Powertel, Inc., 743 So. 2d at 576.
17 AT&T Mobility, 131 S. Ct. at 1748.
18 Id. (citation omitted).
19 Hooters of America, 173 F.3d at 940.
20 Green Tree Financial Corp. Alabama v. Randolph, 531 U.S. 79, 92 (2000). The Court declined to discuss the nature of the proofs that would be required.
21 Ferguson, 298 F.3d at 787. See also Cole v. Burns International Security Services, 105 F.3d 1465, 1482 (D.C. Cir. 1997) (which in finding an arbitration agreement enforceable considered, among other factors, that it provided for more than “minimal discovery”).
22 United Steelworkers of America v. American Manufacturing Co., 363 U.S. 564, 570-71 (1960).
23 Atkinson v. Sinclair Refining Co., 370 U.S. 238, 241 (1962); The Regency Group, Inc. v. Joseph L. McDaniels, 647 So. 2d 192 (Fla. 1st DCA 1994).
24 R.W. Roberts Construction Co. , 423 So. 2d at 633 (citing 16 S. Williston, A Treatise on the Law of Contracts §1919A (3d ed. 1976)).
25 Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126, 1131 (7th Cir. 1997).
26 Accord The Money Place, Inc. v. Barnes, 349 Ark. 411 (Ark. 2002); Stevens/Leinweber/Sullens, Inc. v. Holm Development and Management, Inc., 165 Ariz. 25 (Ct. App. 1990). Contra McNaughton v. United Healthcare Servs., Inc., 728 So. 2d 592 (Ala. 1998).
27 Fla. Stat. §§400.022 and 400.023.
28 Shotts, 86 So. 3d at 474.
29 Id. at 478.
30 Bland, 927 So. 2d 252.
31 Shotts, 86 So. 3d at 464, 465 (citing Global Travel Marketing, Inc. v. Shea, 908 So. 2d 392, 398 (Fla. 2005)).
32 Fla. Stat. §400.023(2).
33 Blankenfeld, 902 So. 2d 296.
34 Florida, like many states, has an arbitration act modeled after the federal statute. See Fla. Stat. §682.01.
35 Circuit City, 532 U.S. at 109.
36 Id. (citing 2A N. Singer, Sutherland on Statutes and Statutory Construction 47.17 (1991)).
37 Id. at 116-118.
Donald J. Spero is a graduate of the University of Michigan Law School who has practiced labor and employment law for more than 45 years , both in private practice and as in-house counsel for Sears, Roebuck and Co., from which he retired as senior employment counsel. He now devotes h is time to serving as a mediator and an arbitrator. He is board certified in labor and employment law.
This article is submitted on behalf of the Labor and Employment Law Section, Robert Stuart Turk, chair, and Robert Eschenfelder, editor.