Arbitration clauses are the fashion now. We are frequently reminded that parties save time and money through the arbitration alternative to litigation. It is not without irony, then, that arbitration clauses have engendered plenty of old-fashioned litigation. Two recent Pennsylvania federal court decisions deal with the enforceability of arbitration clauses, and both decisions foretell of added litigation in the arbitration arena.
The two cases, Crumpler v. Midland Credit Management, No. 13-1953 (Dec. 13, 2013), and Porreca v. The Rose Group, No. 13-1674 (Dec. 11, 2013), come out of the Eastern District of Pennsylvania. They both decide motions to compel arbitration, and they demonstrate that such motions will often require discovery, and perhaps trial, to be resolved. Contrary to the intent and spirit of arbitration clauses, enforcing an arbitration clause is not always easy. Ironically, such clauses seem to foment litigation in the name of avoiding it.
But let’s step back to see the big picture. Contracts between businesses and their customers or employees increasingly contain mandatory arbitration clauses. Usually, the parties do not negotiate over the terms of these clauses. The clauses are one-sided in favor of the business entity, and they typically limit the remedies available in arbitration and preclude class action proceedings. In case law developed recently by the U.S. Supreme Court, federal law requires enforcement of these terms, even where state contract law would render them voidable as unconscionable or where arbitration may, in practice, be an ineffective remedy. Although the use of mandatory arbitration clauses in this manner is controversial, the law now clearly permits it.
In AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempted California law, which considered it unconscionable for an arbitration clause to preclude class action proceedings. Under Concepcion, employers can enforce arbitration clauses that preclude the classwide aggregation of claims. In American Express v. Italian Colors Restaurant, 470 U. S. 213, 221, the Supreme Court went a step further. In that case, it found that it was not unconscionable under the FAA for an arbitration clause to preclude classwide proceedings, even where the cost of individually arbitrating the claims (antitrust claims, in that case) would exceed the potential recovery.
Concepcion and American Express mean that a business can hold its consumers or employees to mandatory arbitration clauses, including those waiving the right to aggregate claims and proceed on a classwide basis. But neither case addresses how the employer is to prove that there was agreement by the customer or employee to arbitrate. And there’s the rub. That requires a factual showing. The recent Crumpler and Porreca decisions in the Eastern District of Pennsylvania discuss the standard of proof and the procedural path to be followed in determining whether there has been a “meeting of the minds” on arbitration.
Crumpler and Porreca follow on the heels of a 2013 U.S. Court of Appeals for the Third Circuit decision, Guidotti v. Legal Helpers Debt Resolution, No. 12-1170, (May 28, 2013). In Guidotti, the Third Circuit decided that a motion to compel arbitration should be treated like a typical fact dispute in a conventional federal case. If the complaint and documents mentioned therein permit the court to decide whether the parties agreed to arbitrate, then the court decides the motion under Rule 12′s motion to dismiss standard. If the complaint is ambiguous, or if the party resisting arbitration comes forward with some evidence that it did not agree to arbitration, then the court employs a summary judgment standard and allows for discovery and briefing. If after discovery the court concludes that there is still a dispute of material fact, and denies summary judgment, then a mini-trial in front of either the judge or a jury is required to determine whether the parties agreed to arbitrate.
The new trial court decisions put flesh on that theoretical skeleton. In both Crumpler and Porreca, the Eastern District of Pennsylvania trial bench adopts a multistep procedure to resolve motions to compel arbitration. If the facts about agreement to arbitrate or unconscionability of arbitration are in dispute, the court will allow discovery on those points. The court will then review the resulting record on a summary judgment standard. If the material facts are still in dispute at that stage, arbitrability must be tried in a mini-trial proceeding before the judge or, if requested by a party, a jury.
In Crumpler, decided by U.S. District Judge Cynthia Rufe, the plaintiff alleged that the defendants made false statements while attempting to collect on an unpaid telephone bill. The plaintiff, Anthony Crumpler, filed a putative class action, asserting violations of the Fair Debt Collection Practices Act. The defendants moved to compel arbitration, citing an arbitration clause and class action waiver in the telephone carrier’s contract with Crumpler. Crumpler claimed that he had never agreed to the arbitration clause. Crumpler alleged that he never received the carrier’s standard terms and conditions—the document containing the arbitration clause. Given Crumpler’s allegations, the court allowed limited discovery, including a deposition of the telephone company, about the company’s practices for disseminating its standard terms and conditions.
Having allowed discovery and moved beyond the Rule 12 point, Rufe analyzed the parties’ evidence under Rule 56′s summary judgment standard. Comparing Crumpler’s evidence—his own declaration that he never received notice of the arbitration clause—to the telephone carrier’s testimony that it sent its terms and conditions to Crumpler and told him about them over the phone, the court concluded that a genuine factual dispute existed about whether Crumpler had agreed to the arbitration clause. Accordingly, Rufe denied the motion to compel arbitration and is allowing further discovery on that question. At the conclusion of that discovery, the court will either decide the motion on the enhanced record or submit the issue of arbitrability to trial.
In Porreca, the plaintiff, Charles Walton, sued his employer for underpayment of wages under the Fair Labor Standards Act (FLSA) and the Pennsylvania Minimum Wage Act. He sought to proceed both as an FLSA collective action and a Rule 23 class action. The employer moved to compel arbitration, and Walton opposed—claiming that the arbitration clause, class action waiver and other features of the employer’s dispute resolution procedure were unconscionable and unenforceable.
Because the facts needed to resolve the issue were not fully apparent from the complaint, the court ordered the parties to conduct discovery about the unconscionability issue. This discovery included the depositions of Walton, the employer’s regional director, and the employer’s vice president of human resources. The employer then renewed its motion to compel arbitration.
Like Rufe in Crumpler, U.S. District Judge Berle Schiller followed Guidotti‘s command to apply the summary judgment standard to the motion to compel arbitration. On the record generated during discovery, he concluded that the arbitration agreement was procedurally unconscionable. But that was not enough to deny arbitration. Following the binding Supreme Court precedent of Concepcion and American Express, Schiller found that the employer also needed to prove substantive unconscionability, and it had not done that. Using Supreme Court guidelines, Schiller held that the class action waiver was not unconscionable, although in his view, “this current state of legal affairs is lamentable.” He then granted the motion to compel arbitration and held that the arbitration must proceed on an individual employee-by-employee basis.
In summary, federal law will go far to enforce arbitration clauses, including those with class action waivers. But a business seeking to invoke such a clause may find itself embroiled in litigation about whether its adversary agreed to the clause and under what circumstances. To avoid collateral litigation over consent to arbitration clauses, businesses would do well to document the notice given to the other party and the other party’s agreement to arbitrate. If consent is clear from the pleadings or related documents, courts will decide arbitrability on a motion to dismiss standard and the parties avoid discovery and fact-finding by the court or jury. Attempting to “sneak” the arbitration clause past an unwary employee or customer will likely not work. It will only create the need for added discovery and trial proceedings on the issue of consent. Although a business has strong incentives to enforce mandatory arbitration clauses, if consent to arbitrate is not clear, it will likely have to endure costly discovery and motion practice, and potentially even a jury trial, to get to arbitration.
Jeffrey G. Weil is chair of the commercial litigation department at Cozen O’Connor and is experienced in class action litigation, including securities, products liability and antitrust. He can be reached at email@example.com.
Joshua N. Ruby also practices in the commercial litigation department at the firm in Philadelphia. He graduated from the University of Chicago and Harvard Law School, and clerked for three judges at the federal and state levels.