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A unanimous Indiana Supreme Court holds that a predispute arbitration agreement (“PDAA”) and class action waiver unilaterally added by the bank to its account agreement were not enforceable. We let the Opinion in Decker v. Star Financial Group Inc., No. 22S-PL-305 (Ind. Mar. 21, 2023), speak for itself.

Facts and Procedural History

“Plaintiffs, Cliff and Wendy Decker, have a checking account with Star Financial Bank, a wholly owned subsidiary of defendant, Star Financial Group, Inc. The Deckers, on behalf of themselves and others similarly situated, filed a class-action complaint alleging the Bank collected improper overdraft fees. Before the Deckers sued, the Bank added an arbitration and no-class-action addendum to the terms and conditions of the Deckers’ account agreement. After the Deckers sued, the Bank cited the addendum and responded with a motion to compel arbitration, which the trial court granted.”

Issues

“The Deckers raise three arguments on appeal: (1) the Bank buried notice of the addendum at the end of their monthly statement and thus did not provide the contractually required reasonable notice; (2) the account agreement’s change-of-terms clause did not allow the Bank to add the addendum; and (3) the continued use of their checking account did not manifest their assent to the addendum…[] For us to affirm the trial court’s judgment of dismissal, the Bank must run the table on all three of the Deckers’ arguments. In contrast, the Deckers need win only one of their arguments for us to resolve the appeal in their favor. Without expressing any opinion on the merits of the Deckers’ first and third arguments, we hold that the specific language of the account agreement’s change-of-terms clause did not permit the Bank to add the addendum. Thus, the addendum was not a valid amendment to the account agreement.”

Reasoning: Bank’s Own Language Limits Changes

“The agreement’s operative provision is Section 10, which allows the Bank to ‘change any term of this agreement.’ The Bank proceeded here as if the account agreement’s change-of-terms clause gave it a blank check to amend the agreement any way it saw fit to fend off threatened litigation. But Section 10—which the Bank itself wrote—is not so elastic. This section does not say the Bank can change the agreement however it wants. If the Bank wanted such flexibility, it might have given itself the power to ‘change this agreement’ as desired. Instead, the section is more limited in scope. It limits the Bank to changing ‘any term of this agreement.’ Words matter. The difference between a far-reaching power to amend “this agreement” and the narrower power to amend ‘any term of this agreement’ makes all the difference on this record. The latter—which governs here—limits the Bank to modifying the terms that existed in the original account agreement. Relevant here, the original agreement contained neither a general dispute-resolution provision nor a specific arbitration or no-class-action provision. Thus, there was not ‘any term’ of that agreement the Bank could ‘change’ to effectuate the result it sought here through its addendum. Because the original account agreement did not mention dispute resolution generally or arbitration or class action specifically, Section 10 did not permit the Bank to add such provisions by amendment. To conclude otherwise would violate Section 10” (emphasis in original)

Concurring Opinion: Right Result But Wrong Reason

Judge Goff concurs in the result, but for a different reason: “I agree with the Court that the Deckers are not bound by the arbitration addendum to their account agreement. But I reach that conclusion for a different reason. In my view, the agreement—taken as a whole—permits the addition of an arbitration addendum. But, given the lack of reasonable opportunity to reject the addendum, the Deckers did not, as I see it, assent to a change in terms.”

(ed: We’re with Judge Goff.)

Overruling prior Circuit precedent, the Eleventh Circuit finds that the grounds set forth in FAA section 10 are the sole basis for challenging “foreign” awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“UN Convention”), where the arbitration took place in the United States.

An issue dividing the Circuits and some state courts is the grounds for challenging awards under the UN Convention. The views range from: 1) application of the grounds in Article V of the Convention, as implemented by Federal Arbitration Act (“FAA”) Chapter 2’s 9 U.S.C. section 207; 2) the grounds set forth in FAA Chapter 1’s 9 U.S.C. section 10; and/or 3) both for “foreign” awards resulting from an arbitration conducted in the U.S. For the Eleventh Circuit, Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., No. 20-13039 (11th Cir. Apr. 13, 2023), represents reversal of precedent dating back for over 20 years, and holds unanimously that in UN Convention arbitrations conducted in the U.S., only the FAA Chapter 1 grounds are available. We borrow liberally from the Opinion. 

Background

“The United States is a signatory to the New York Convention, a treaty which regulates international arbitration awards. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 4739. Congress has implemented the Convention through Chapter 2 of the Federal Arbitration Act. See 9 U.S.C. §§ 201 et seq.[] Our task is to decide what grounds can be asserted to vacate an arbitral award governed by the New York Convention.”

Procedural History

“Dissatisfied with the arbitral decision, Corporación AIC filed suit in federal court seeking to vacate the award. It asserted that the arbitral panel had exceeded its powers, a ground set out in 9 U.S.C. § 10(a)(4), a provision of Chapter 1 of the FAA…. The district court ruled that such a challenge was unavailable because under Eleventh Circuit precedent, namely Industrial Risk and Inversiones, the grounds for vacatur of an arbitral award governed by the New York Convention are limited to those set out in Article V of the Convention. The district court therefore did not analyze whether the arbitral panel had exceeded its powers.”

Prior Precedent …

“Industrial Risk [Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1445–46 (11th Cir. 1998)], decided in 1998, held that when a party seeks vacatur of an arbitral award issued under the New York Convention a district court can only consider the grounds set out in Article V of the Convention…. Over 20 years later, Inversiones [y Procesadora Tropical INPROTSA, S.A. v. Del Monte International GmbH, 921 F.3d 1291, 1301–02 (11th Cir. 2019)], adhered to Industrial Risk because it constituted binding Eleventh Circuit precedent.”

… Overruled

“We hold that in a New York Convention case where the arbitration is seated in the United States, or where United States law governs the conduct of the arbitration, Chapter 1 of the FAA provides the grounds for vacatur of an arbitral award. To the extent that Industrial Risk and Inversiones are inconsistent with this holding, we overrule them.[] The district court correctly followed Industrial Risk and Inversiones, which constituted binding precedent at the time, and declined to address Corporación AIC’s argument that the arbitral award should be vacated because the panel exceeded its powers under 9 U.S.C. § 10(a)(4). We vacate the judgment in favor of Hidroeléctrica and remand for the district court to consider Corporación AIC’s § 10(a)(4) contention” (footnote omitted).

(ed: *Certiorari was denied in Industrial Risk. **We think this issue cries out for resolution by SCOTUS!)

Because standing under PAGA is a matter of State law, a California appellate court finds it is not bound by SCOTUS’ analysis of the issue in Viking River.

Seifu v. Lyft, Inc., No. B301774 (Calif. Ct. App. 2 Mar. 30, 2023), is one of those rare cases where we are comfortable merely quoting the Opinion verbatim. We’ve added the headers:

Basic Facts

Respondent Million Seifu is a former driver for appellant Lyft, Inc. In 2018, he filed suit against Lyft under the Private Attorneys General Act of 2004 (PAGA)  (Lab. Code, § 2698 et seq.). He alleged that Lyft misclassified him and other drivers as independent contractors rather than employees, thereby violating multiple provisions of the Labor Code.

Procedural History

Lyft moved to compel arbitration based on the arbitration provision in the “Terms of Service” (TOS) that it required its drivers to accept in order to offer rides through Lyft’s smartphone application. The trial court denied the motion, finding the PAGA waiver in the arbitration provision unenforceable under then-controlling California law. Lyft appealed, and in June 2021 we affirmed the denial of Lyft’s motion to compel arbitration.

SCOTUS Weighs In

Lyft petitioned the United States Supreme Court for a writ of certiorari. In June 2022, the Court granted Lyft’s petition, vacated the judgment, and remanded the case for further consideration in light of Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. ___ [142 S.Ct. 1906, 213 L.Ed.2d 179] (Viking River). We recalled the remittitur, vacated our prior decision, and requested supplemental briefing from the parties on the application of Viking River to this case.

New Issue Post-Viking

Seifu concedes that under Viking River his claim for civil penalties based on alleged Labor Code violations he personally suffered (his individual PAGA claim) is subject to arbitration. We agree, and therefore reverse the denial of that portion of Lyft’s motion to compel arbitration.

The crux of the parties’ dispute here is the fate of Seifu’s remaining claims for civil penalties based on alleged Labor Code violations suffered by other employees (his non-individual PAGA claims). Lyft argues that Seifu lacks standing to litigate the non-individual claims once his individual claims are sent to arbitration, and the former claims therefore must be dismissed.

Seifu counters that, as a matter of state law, he retains standing to pursue the non-individual PAGA claims in court.

Ruling: PAGA Standing is a State Law Matter

We conclude that we are not bound by the analysis of PAGA standing set forth in Viking River. As Justice Sotomayor recognized in her concurring opinion, PAGA standing is a matter of state law that must be decided by California courts. Until we have guidance from the California Supreme Court, our review of PAGA and relevant state decisional authority leads us to conclude that a plaintiff is not stripped of standing to pursue non-individual PAGA claims simply because his or her individual PAGA claim is compelled to arbitration. [] We therefore reverse in part and affirm in part the trial court’s order denying Lyft’s motion to compel arbitration. We remand the matter to the trial court with directions to: (1) enter an order compelling Seifu to arbitrate his individual PAGA claim; and (2) conduct further proceedings regarding Seifu’s non-individual claims consistent with this opinion.

(ed: We are sure this is by no means the end of it.)

A recent House subcommittee hearing reviewing the performance of the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) among other topics discussed the Bureau’s efforts to create an arbitration clause registry.

Specifically, the House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy held a March 9 hearing, Consumer Financial Protection Bureau: Ripe for Reform. One of the topics discussed was the CFPB’s proposed new rule seeking information from nonbanks on, among other things, arbitration and class action waivers.

Rule on Registry Introduced …

Recall that, as reported in SAA 2023-04 (Jan. 26), the Bureau on January 12 announced via press release that it had filed a rule proposal:

“to establish a public registry of supervised nonbanks’ terms and conditions in ‘take it or leave it’ form contracts that claim to waive or limit consumer rights and protections, like bankruptcy rights, liability amounts, or complaint rights…. Under the proposed rule, nonbanks subject to the CFPB’s supervisory jurisdiction would need to submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections. That information would be posted in a registry that will be open to the public, including to other consumer financial protection enforcers.”

… And Covers Mandatory Arbitration Agreements and Class Action Waivers

Any ambiguity about whether the proposed rule covered mandatory predispute arbitration agreements and class action waivers was resolved in the affirmative. Says the release:

“Under the proposal, the CFPB would seek information on contract terms and conditions seeking to waive any constitutional, statutory, or common law legal protection, right, or defense; restrict the ability of consumers to complain; limit the time or place for consumers to bring legal actions; limit liability amounts; waive class action rights; and impose arbitration provisions. Both company information and information about the use of the terms and conditions would be published” (emphasis added).

Topic of Discussion at Subcommittee Hearing

Among the witnesses at the Subcommittee hearing was William M. Himpler, the CEO of the American Financial Services Association (“AFSA”), who said in his prepared testimony:

“In 2017, the CFPB finalized a rule that would eliminate pre-dispute arbitration agreements. Congress overturned the rule using its authority under the Congressional Review Act (CRA). As Congress has made clear, when a rule is overturned under the CRA, an agency is prohibited from doing anything ‘substantially similar.’[] Despite the prohibition, the CFPB continues to pursue the elimination of arbitration, this time by proposing a nonbank registry where finance companies and others would be required to register certain terms and conditions, such as arbitration agreements and other beneficial agreements with consumers, that the Bureau would post in a public registry. This public registry is an attempt to: (1) shame companies out of using lawful arbitration agreements, and (2) give plaintiffs’ attorneys a roster of companies to sue. As House Financial Services Chairman Patrick McHenry (R-NC) said: ‘This is another attempt by Director Chopra to unilaterally expand the CFPB’s authority beyond Congress’ intent and to mandate what Democrats were unable to legislate. This proposed registry of terms and conditions will facilitate the naming and shaming of firms to empower progressive activists. Requiring nonbank financial firms to register publicly with the Bureau is unprecedented—no other industry is required to make public such detailed contract information’” (footnote omitted).

(ed: *We’re sure there is more to come on this proposal. **Not to be sticklers, but the nullified 2017 rule did not: “eliminate pre-dispute arbitration agreements.” It banned class action waivers. ***The 2.5 hour hearing is recorded in a video.)

By George H. Friedman, SAA Publisher & Editor-in-Chief

The Supreme Court heard oral argument this week in Coinbase, Inc. v. Bielski, No. 22-105.

As reported in SAAs 2023-11 (Mar. 16) and -07 (Feb. 16) the Supreme Court on March 21 heard the oral argument in Coinbase. It was the second case heard that morning. The audio is here and the transcript can be found here.

Certiorari Petition

As reported in SAA 2023-47 (Dec. 15), the Court’s December 9, 2022 Order List granted Certiorari in the case. The issue in this matter is a technical one, as described in the July 2022 Petition:

“Under § 16(a) of the Federal Arbitration Act, when a district court denies a motion to compel arbitration, the party seeking arbitration may file an immediate interlocutory appeal. This Court has held that an appeal ‘divests the district court of its control over those aspects of the case involved in the appeal.’ Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982) (per curiam).[] The question presented is: “Does a non-frivolous appeal of the denial of a motion to compel arbitration oust a district court’s jurisdiction to proceed with litigation pending appeal, as the Third, Fourth, Seventh, Tenth, Eleventh and D.C. Circuits have held, or does the district court retain discretion to proceed with litigation while the appeal is pending, as the Second, Fifth, and Ninth Circuits have held?” (links added by the Alert).

Case Below

We covered in SAA 2022-17 (May 5) the trial court decision below, Bielski v. Coinbase, Inc., No. C21-07478, 2022 WL 1062049 (N.D. Cal. Apr. 8, 2022). There, the District Court, applying California contract law, held that the predispute arbitration agreement covering the case before it was both substantively and procedurally unconscionable. The subsequent District Court and Ninth Circuit decisions declining to stay the case pending the appeal are unreported. We covered the case in detail in SAA 2023-11 (Mar. 16), and in a March 14 blog post, Reminder: Oral Argument in Coinbase is March 21. What You Need to Know.

The Oral Argument

With a full complement of Justices, the oral argument in this consolidated case was audio livestreamed via the SCOTUS Website. The Court’s March 6 Order List on page 2 denied Respondents’ unopposed motion for divided argument. The discussion focused squarely on the intent of FAA section 16, with several references to Griggs and occasional references to “Timbuktu.” Coinbase’s counsel Neal Kumar Katyal asserted that the statute assumes a stay of the underlying District Court cases. He argued that allowing the District Court to proceed would result in the “toothpaste being out of the tube” with respect to aspects such as discovery and undue settlement pressure. The Court’s pro-arbitration wing was relatively quiet, with the bulk of the questions coming from Justices Kagan and Sotomayor (although Justice Thomas was atypically active). A key theme of these Justices was that, if Congress intended FAA section 16(a) to provide an automatic stay, it would have said so directly. Hassan Ali Zavareei, Counsel for the Suski Respondents, led with: “Congress means what it says and says what it means,” echoing the sentiments of the liberal wing Justices.

For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse these March 21 posts: Coinbase Argues an Arbitration Case in U.S. Supreme Court as Crypto Makes Its Debut (CoinDesk); U.S. Supreme Court Divided Over Coinbase Arbitration Dispute (Reuters); Supreme Court Hears Arguments in Coinbase Arbitration Case (Axios); and Today’s #SCOTUS Arguments: When Is an Arbitration Appeal Stay Really a Stay? (CPR Speaks).

(ed: *Amicus Briefs aplenty were filed in this case and may be found here. **The Court’s Website posts audio recordings and transcripts the same day as arguments. ***There was a puzzling exchange (transcript page 78) where it was asserted that AAA and JAMS arbitrations were open to the public and there was no presumption of confidentiality. We point out that the AAA Commercial Arbitration Rules state in Rule R-45(a): “Unless otherwise required by applicable law, court order, or the parties’ agreement, the AAA and the arbitrator shall keep confidential all matters relating to the arbitration or the award.” Likewise, Rule R-26 provides: “The arbitrator and the AAA shall maintain the privacy of the hearings unless the law provides to the contrary.” ****We’re not willing to hazard a prediction as to where the Court will land, although to us the pro-arbitration wing seemed sympathetic to Coinbase’s arguments.)

A divided Ninth Circuit Panel holds that California’s AB-51 is preempted by the Federal Arbitration Act (“FAA”).

Enacted in 2019, AB-51 is a law that restricts predispute arbitration clauses (“PDAA”) in employment relationships. It provides:

“A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act [FEHA] (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation…. An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure….”

There are also criminal penalties for violations: “It is an unlawful employment practice for an employer to violate [the law]…. Any person violating this article is guilty of a misdemeanor.”

Basic Litigation History

As reported in SAA 2021-36 (Sep. 23), a split Ninth Circuit in Chamber of Commerce of the United States v. Bonta, 13 F.4th 766 (9th Cir. 2021), ruled on the validity of AB-51. The divided Court held that the mandatory PDAA use preclusions in the new law withstood FAA preemption scrutiny, but the criminal and civil penalties for mandatory PDAA use do not. In October 2021, the Chamber and the other challengers filed a Motion for En Banc Review. We later reported in SAA 2021-48 (Dec. 23) that the State and other Respondents filed their response in December 2021. The thrust of the argument, as expressed in their brief (ed: repeated essentially verbatim): 1) the Panel decision respects the FAA and Supreme Court precedent; 2) the Panel decision creates no intra- or inter-Circuit conflict; and 3) there is no special need to review this decision.

SCOTUS and Viking River

With the issue joined, as reported in SAA 2022-07 (Feb. 24), a majority of the Ninth Circuit Panel in February 2022 sua sponte issued an Order deferring consideration of the Petition until after the Supreme Court decided Viking River Cruises, Inc. v. Moriana, No. 20-1573, set for argument March 30, 2022. The question presented in the granted May 2021 Petition for Certiorari in Viking River was:

“Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under [California’s Private Attorney General Act] PAGA.”

As our readers know, the United States Supreme Court in June 2022 held 8-1 in Viking River that PAGA was in part preempted by the Federal Arbitration Act, insofar as PAGA allowed employees to evade bilateral predispute arbitration agreements. That would generally have been the end of the case as far as SCOTUS was concerned, but that was not the case here. In July 2022, Moriana filed a Petition for  Rehearing, suggesting:

“[T]he Court should grant rehearing solely for the purpose of modifying Part IV of its opinion to state that the Court does not decide the state-law issues of severability and standing and that its disposition is limited to reversal in part of the state court’s holding that the lskanian rule is not preempted by the FAA….”

A Bolt From the Blue

The reargument request was denied without comment by SCOTUS on August 22, 2022. As reported in SAA 2022-33 (Sep. 9), that same day the Ninth Circuit Panel issued a two-page Order sua sponte withdrawing the original decision and dissent and ordering a rehearing, stating:

“A majority of the panel has voted sua sponte to grant panel rehearing. Judge Fletcher and Judge Ikuta voted in favor of rehearing, and Judge Lucero voted against rehearing. The opinion and dissent filed on September 15, 2021 … are withdrawn, and the case is resubmitted. The petition for rehearing en banc … is DENIED as moot” (emphasis in original; internal citations omitted).

Upon Further Review, FAA Preempts AB-51

Upon reconsideration, a divided Court holds in Chamber of Commerce of the United States v. Bonta, No. 20-15291 (9th Cir. Feb. 15, 2023), that the FAA preempts AB-51:

“We therefore conclude that the approach adopted by the Supreme Court in Casarotto and Kindred Nursing for determining whether the FAA preempts a state rule limiting the ability of parties to form arbitration agreements applies to state rules that prevent parties from entering into arbitration agreements in the first place…. We agree with our sister circuits that the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement.”

In sum: “AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement is antithetical to the FAA’s ‘liberal federal policy favoring arbitration agreements.’… Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”

Dissent: AB-51 Conforms to the FAA

Judge Lucero dissents, contending that the statute does not run afoul of the FAA:

“AB 51’s purpose matches the FAA’s purpose. The clear language of the FAA and those cases neither state nor imply that an employer may compel arbitration as a condition of employment, as the majority declares. Instead, the FAA’s history, legislative purpose, and caselaw all demonstrate its intention to honor agreements freely agreed to according to the terms voluntarily submitted to by both parties. AB 51 advances that purpose. AB 51 ensures contracts are “entered into as a matter of voluntary consent, not coercion.” … This does not form an obstacle to the FAA’s purpose of ensuring consensual agreements are honored.”

(ed: We are not surprised. Our editorial comment after the Court declared a “do-over” was: With Judge Fletcher joining [original] dissenter Ikuta, it seems to us that AB-51 may be standing on shaky legs.”)

In a case of first impression, the New Jersey Appellate Division holds that the strict “waiver of jury trial” requirement for predispute arbitration agreements (“PDAA”) involving consumers articulated in Atalese and its progeny does not apply to PDAAs between sophisticated parties of relatively equal bargaining positions.

Atalese v. U.S. Legal Services Group L.P., 219 N.J. 430 (2014), Cert. den. 540 U.S. 938 (2015), tells us that, to be enforced in New Jersey, a PDAA in a consumer context must contain a clear, unambiguous waiver of the right to a jury trial. That standard was later extended to employment matters. But does the Atalese test apply to a commercial transaction involving sophisticated business parties? “No,” say a unanimous Court in County of Passaic v. Horizon Healthcare Services, Inc., No. A-0952-21 (N.J. App. Div. Feb. 8. 2023) (per curiam), a case of first impression.

PDAA in Business Contract

The contract between the County of Passaic and Horizon Healthcare Services, Inc. called for the latter to manage the County’s self-funded health benefit plan. The PDAA provided: “In the event of any dispute between the parties to this Agreement arising under its terms, the parties shall submit the dispute to binding arbitration under the commercial rules of the American Arbitration Association.” There was no express jury trial waiver as mandated by Atalese. After a dispute arose, Horizon succeeded in getting an Order compelling arbitration. The County appealed, arguing that: “the arbitration provision is unenforceable because it lacks the explicit waiver of access to the courts prominently featured in the Supreme Court’s landmark decision in Atalese ….”

Appellate Court: Atalese is Not Applicable

The Court rejected this argument:

“because, even though the arbitration provision does lack such an explicit waiver, the County is a sophisticated contracting party and is not – as in Atalese and other authorities – an employee or consumer lacking sufficient bargaining power to resist the extraction of an agreement to arbitrate…. We hold – because the parties are sophisticated and possess relatively equal bargaining power – Atalese‘s requirement of an express waiver of the parties’ right to seek relief in a court of law is inapplicable and the arbitration agreement is enforceable…. Atalese, as well as other decisions from our [NJ] Supreme Court, focus on the unequal relationship between the contracting parties or the adhesional nature of the contract when holding that an arbitration agreement could not be enforced without an express waiver of the right to seek relief in a court of law…. This concern for those not versed in the law or not necessarily aware of the fact that an agreement to arbitrate may preclude the right to sue in a court or invoke the inestimable right of trial by jury, on the other hand, vanishes when considering individually-negotiated contracts between sophisticated parties – often represented by counsel at the formation stage – possessing relatively similar bargaining power.”

(ed: Makes sense to us.)

Because the employee’s sexual harassment lawsuit predated the March 2022 effectiveness of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (“EFASASHA”), the law could not be used to invalidate the predispute arbitration agreement (“PDAA”) in question, but the PDAA was unconscionable and thus unenforceable.

EFASASHA was signed into law on March 3, 2022. It expressly amended the Federal Arbitration Act (“FAA”) to make predispute arbitration agreements and class action waivers voidable at the option of the victim, and to make arbitrability an issue for the court, not arbitrators. The new law has been codified as FAA Chapter 4. It consists of § 401 (definitions) and § 402 (no validity or enforceability).

No Retroactive EFASASHA Application …

As to retroactivity, the statute says:

“This Act, and the amendments made by this Act, shall apply with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act.”

This language, a unanimous Court finds in Murrey v. Superior Court of Orange County, No. G061329 (Calif. Ct. App. 4 Jan. 30, 2023), means that EFASASHA cannot apply, because the claim and suit accrued well before March 2022:

“We regret that this new legislation does not apply retroactively to Casandra Murrey’s complaint filed in March 2021…. Murrey filed her case approximately one year before the Act was enacted. ‘During debate, Congress clarified that the Act is retroactive “as to contracts currently signed,” but not to ‘cases currently pending.’ In other words, the Act is only applicable to cases filed after its enactment.”

… But the PDAA is Unconscionable

The Court finds, however, that the arbitration clause is unconscionable and therefore unenforceable:

“The arbitration agreement in this case contained a high degree of procedural unconscionability. If these provisions had not been challenged in litigation, Murrey would have been at a significant disadvantage during arbitration. There were also multiple substantively unconscionable provisions, some of which would require us to substantially rewrite the agreement to remove the offending provisions, which we cannot do. When we consider the procedural and substantively unconscionable provisions together, they indicate a concerted effort to impose on an employee a forum with distinct advantages for the employer. As in Armendariz, we conclude ‘the arbitration agreement is permeated by an unlawful purpose.’ Accordingly, we vacate the court’s order granting the motion to compel arbitration” (citations omitted).

Not to Be Sticklers, but …

Although not central to the Opinion, we take issue with this language in the first paragraph (ed: bold highlighting added):

“In March 2022, President Joseph R. Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the Act) (9 U.S.C. §§ 401, 402), representing the first major amendment of the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) since its inception nearly 100 years ago. This legislation, having bipartisan support, voids predispute arbitration clauses in cases, such as the one before us now, involving sexual harassment allegations.”

• First, there have been major amendments to the FAA since its passage in 1925. For example, there was a significant amendment in 1988 (section 15— Inapplicability of Act of State Doctrine). Also, the additions of Chapters 2 and 3 were in our view “major.” And there were others….
• Second, the new law makes the clauses voidable at the option of the victim, notvoid ab initio. Says the law: “… at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.”

(ed: *Despite our linguistic critique, we think the case was rightly decided. **Your editor worked in the AAA’s Legal Department in the early 1980s and was involved preparing an Amicus Brief for the appeal giving rise to the referenced 1988 FAA amendment effort. ***An Alert h/t to Editorial Board member Peter R. Boutin, Esq., of Keesal, Young & Logan, for alerting us to this decision.)

FINRA Dispute Resolution Services (“DRS”) has posted case statistics for full-year 2022, with recent trends persisting, resulting in a strong finish in arbitration filings.

After FINRA DRS posted the November 2022 stats, we opined in SAA 2023-01 (Jan. 5) that: “recent trends suggest[] a strong end to the year in arbitration filings.” That prediction was spot on.

The Headlines

We offer these headlines: 1) overall arbitration filings for the year – 2,671 cases – were down 8% for the year (but up from minus 11% in November); 2) cumulative customer claims declined by 11% (up from -14% In November); and 3) industry arbitration filings were down just 2% (-5% in November). We had said in # 01: “That all three case filing figures are again improved over the previous month indicates to us that – for the fourth month in a row – arbitration filing declines have definitely rebounded.” With the full year stats now posted, we can clearly assert that case arbitration case filings rebounded strongly in the second half of the year.

Potpourri

Overall arbitration turnaround times were steady at 18.3 months, with hearing cases now taking 19.8 months (both figures are barely changed over the past three months). There were 746 mediation cases in agreement last year, a 21% increase (but way down from May’s torrid plus 137% pace). This stat in fact has declined steadily the past several months. The mediation settlement rate remains very high at 91%. There are now 8,180 DRS arbitrators, 3,977 public and 4,203 non-public. These numbers declined across the board in December, to us suggesting a year-end culling. Pending cases stand at 3,091, an increase of 15 from November (the first jump in several months).

Employment Claims

We examined in SAA 2022-47 (Dec. 15) the November “Top 15 Controversy Types in Intra-Industry Arbitrations” stats to determine where employment filings might end up at the end of the year. Specifically, we looked at these controversy types: breach of contract; U-5 related libel or slander; promissory notes; libel, slander, or defamation; discrimination or harassment; and wrongful termination. At that time, we said: “as a group, projected year-end filings will decline from 640 cases to 558, a 12.8% decline. Of the six categories, only two – U-5 related slander or libel and generic libel or defamation – are projected to increase, with the remaining ones all declining.” Let’s see how we did (see the chart below drawn from the year-end stats):

The actual decline for the group was 16%, or 103 cases filings.

Impact of New Law

We repeat here our past coverage of this topic. A new statute might impact the “discrimination/harassment” controversy type going forward. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“Act” or “EFASASHA”) was signed into law by President Biden in March 2022 at a White House ceremony. The statute gives the employee or class/collective representative the right under the Federal Arbitration Act to opt out of predispute arbitration agreements and class action waivers by invalidating them after a dispute arises. FINRA on May 13 filed with the SEC SR-FINRA-2022-012, Proposed Rule Change to Amend the Code of Arbitration Procedure for Industry Disputes (“Code”) to Align the Code with the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. The changes, which were approved by FINRA’s Board of Governors last March, were effective immediately, as provided in the Notice of Filing and Immediate Effectiveness published in the Federal Register on May 24 (Vol. 87, No. 100, P. 31592).

Although the changes were immediately effective on May 13, the Authority on July 15 issued Regulatory Notice 22-15. The rule change language is contained in Attachment A. Among the changes: Rule 13201 was amended by adding new paragraph (c) to provide that a party alleging a sexual assault claim or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post-dispute not to arbitrate the claim under the Code. New paragraph (c) also provides that the claim may be arbitrated if the parties have agreed to arbitrate it after the dispute arose.

(ed: *We said in # 01: “Despite the recent mini-surge in arbitration case filings, if the trend holds, the 2,423 arbitrations filed through November straight-lines to only about 2,650 yearly arbitration filings, a weak year by any measure.” The final year-end stat was 2,671 arbitration filings. **Ten years ago, the 2012 stats showed 4,299 yearly arbitration case filings. The all-time high-water mark was in 2003, when that post tech-wreck figure was 8,945 cases. Past year stats can be found here. ***It seems to us the recent market volatility will fuel arbitration filings. However, as we said before, we think that EFASASHA will minimally impact employment case filings at FINRA.)