ContractsProf Blog

Mark C. Weidemaier on Precedent in Arbitration

Our recent guest-blogger, Mark Weidemaier, has emerged from under a cloud of volcanic ash and produced a new work of scholarship in the field of arbitration.  You can download it from SSRN here.  Here is the abstract:

The claim that arbitrators do not create precedent recurs throughout the arbitration literature. As an empirical matter, however, it is increasingly clear that, in some arbitration systems, arbitrators often cite to other arbitrators, claim to rely on past awards, and promote adjudicatory consistency as an important system norm. Much like courts, then, arbitrators can (but do not always) create precedent that guides future behavior and provides a language in which disputants, lawyers, and adjudicators can express and resolve grievances. This Article provides a theoretical foundation for understanding the conditions under which such precedent will (or will not) arise. It identifies three considerations that may account for the development of precedent across a range of arbitration systems: (1) whether the arbitration system is structurally conducive to the creation of precedent; (2) whether arbitral precedent functions to fill gaps in (or displace) state-supplied law; and (3) whether arbitrators are likely to be viewed as legitimate producers of law in the relevant context. After explaining the relevance of these considerations, the Article explores how they might apply in different arbitration contexts and sets forth a research agenda capable of shedding light on arbitration not only as a mechanism for resolving disputes, but also as a mechanism for generating robust systems of privately made law.

The article is also available on the William & Mary Law Review website

[Jeremy Telman].

Karen Halverson Cross: Impressions/comments on Rent-A-Center v Jackson Oral Argument

What is particularly striking to me about the Rent-A-Center oral argument is the Court’s preoccupation with drawing a line between the types of relatively extreme situations that would show the complete absence of a valid agreement to arbitrate (such as a forged agreement, or one that was obviously coerced) versus other situations, where the Justices appear to be less troubled with enforcing delegation language in the arbitration clause.  It seems to me that many of the Justices share the view of the case that Mark has, as described in his previous post – that is, that at least some of the Justices may not be troubled with sending the issue of unconscionability to the arbitrator in this particular case, but there may be other cases where it would be troubling – such as the type of one-sided arbitration clause that was struck down by the Fourth Circuit in the notorious Hooters case.

Similarly, a number of the Justices seem to suggest that in a case like this one, where Jackson is challenging specific aspects of the arbitration clause, any allegedly unconscionable provision could be effectively “severed” from the basic agreement to arbitrate, leaving the basic obligation to arbitrate intact, allowing a court to leave to the arbitrator the question of whether the specific provisions are unconscionable.  This rationale has been employed in numerous circuit court decisions, and I think also underlies the Court’s decision in PacifiCare.

As for the exchange between Justice Scalia and Justice Ginsburg regarding Hall Street (which Jeremy described in his post):  the contract between Jackson and Rent-A-Center contains a provision allowing for expanded judicial review of the arbitration award (that is, it purports to allow a court to set aside an award not only on FAA grounds, but for errors of fact or law).  Justice Ginsburg commented that this post-review provision made the arbitration agreement more “employee-friendly” than most.  But as she also noted, in Hall Street, the Court held that parties cannot contract for judicial review beyond the statutory grounds provided for in the FAA.  Justice Ginsburg expressed concern that since the post-review provision of the clause is now invalid, the arbitration agreement is less balanced.  Justice Scalia responded that this issue was not previously raised by the parties and therefore the Court cannot consider it.

Finally, as Jeremy noted in his post, Justice Scalia made evident his views on the issues in the case, once commenting in response to Jackson’s counsel that if all allegations of unconscionability were for the court to decide, then, “[w]ell, kiss goodbye to arbitration.”  As Dahlia Lithwick commented yesterday on Slate.com, “more likely, kiss it hello.”  The grounds for challenging an arbitration agreement already are quite circumscribed, due to the Court’s previous arbitration decisions.  If the Court rules in favor of Rent-A-Center in this case and enforces the delegation language in the arbitration clause, such a ruling will dramatically affect the ability of consumers and employees to challenge the enforceability of arbitration agreements, as most challenges will be found to be for the arbitrator to decide (see Chris’s and my previous posts on this issue).

Perhaps in the aftermath of Rent A Center, the future avenue for challenging mandatory arbitration will become post-award review.  As I commented in a previous post, although the First Options dictum suggests that parties could contract in certain circumstances for an arbitrator to make a final (i.e., practically unreviewable) determination of arbitrability, the scope of review issue was not briefed by Rent-A-Center (except for a mention in the reply brief) or by Jackson, nor was it discussed at all at oral argument. 

In fact, the oral argument seems to suggest that the decision of the Court will be premised on the assumption that any arbitrator’s ruling on unconscionability would be subject to post-award review under FAA §10.  Justice Scalia was insistent that an arbitrator would not be able to disregard the law when determining whether an arbitration agreement is unconscionable, even commenting “I think there is no doubt” the award would be set aside if the arbitrator did totally disregard the law.  (Although FAA §10 does not allow a court to set aside an award for an error of law per se, an argument might be made in such as case that the arbitrator exceeded his or her powers under FAA §10(a)(4)).  It is also interesting that a footnote in the court’s Stolt-Nielsen decision seems to breathe new life into the “manifest disregard” ground for vacating an arbitral award, a doctrine that many commentators assumed was dead after the Court’s decision in Hall Street.

Historically, however, courts have interpreted the grounds for setting aside an award under FAA §10 extremely narrowly; it will be interesting to see if courts are any more likely to scrutinize an arbitrator’s findings when an allegedly unconscionable contract is at issue.

[Posted, on Karen Halverson Cross's behalf, by Jeremy Telman]

David Horton on the Rent-A-Center Oral Argument

As Jeremy points out below, some of the most interesting exchanges in the Rent-a-Center oral argument centered on an issue that has baffled courts and scholars for decades (and bored any 1L unlucky enough to take my contract class): what are the policy underpinnings of the unconscionability doctrine?  As Justice Breyer mused aloud on page 48 of the transcript: "What is the underlying rationale in contract law of setting aside contracts as unconscionable?  Why do courts do it?  What's the theory?  I would like to know that."  
 
The outcome in Rent-a-Center may hinge on the answer.  In a nutshell, if unconscionability is truly a post-formation defense that strikes unfair provisions because, well, they're unfair, then it does not relate to the "making" of the arbitration agreement under section 4 of the Federal Arbitration Act.  And if the unconscionability defense doesn't fall within section 4, then the FAA doesn't prohibit arbitrators from deciding whether all or part of an arbitration clause is unconscionable. 
 
On the other hand, if unconscionability actually operates from the premise that a party never truly assented to a one-sided clause, then it may attack the "making" of the arbitration clause.  Arguably, then section 4 requires a court to adjudicate an unconscionability challenge. 
 

The traditional view is probably the former: that unconscionability assumes that a valid contract exists, but then hacks away at some (or all) of it.  Indeed, Rent-a-Center's brief does a great job of collecting sources for that proposition.  Recently, though, it's become more common (at least in the academic literature) to conceptualize unconscionability as applying when informational defects cause a party not to realize that a term sharply deviates from her informed ex ante preferences.  (I've made that argument, albeit in the context of trust law, here).  In other words, unconscionability kicks in when (1) a clause is buried in a take-it-or-leave-it contract (procedural unconscionability) and (2) the harsh nature of the clause reveals that the non-drafting party would have objected to the clause if she'd been aware of it (substantive unconscionability).  Viewed this way, unconscionability does flow from an absence of voluntary, knowing assent.

[Posted, on David Horton's behalf, by Jeremy Telman]

Consumer Law & Policy Blog on Rent-A-Center

Deepak Gupta has a couple of posts on Rent-A-Center v. Jackson worth looking at.

The first is from April 1st.

The second is from yesterday.  Yesterday's post links to a number of other discussions of the case.

Thanks to Christopher Drahozal for directing us there.

[Jeremy Telman]

Weekly Top Tens from the Social Science Research Network

 RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal 
February 27, 2010 to April 28, 2010

Rank	Downloads	Paper Title
1	276	The Shadow of State Secrets  Laura Donohue,  Georgetown University Law Center
2	258	A Myth Deconstructed: The 'Emperor’s New Clothes' on the Low Profit Limited Liability Company  Daniel S. Kleinberger,  William Mitchell College of Law
3	241	The Single Member Limited Liability Company as Disregarded Entity: Now You See it, Now You Don’t  Daniel S. Kleinberger, Carter G. Bishop,  William Mitchell College of Law, Suffolk University Law School
4	232	The Low-Profit LLC (L3C): Program Related Investment by Proxy or Perversion?  Carter G. Bishop,  Suffolk University Law School
5	197	Virtue and Contract Law  Chapin Cimino,  Drexel University - Earle Mack School of Law
6	181	Regulatory Arbitrage  Victor Fleischer,  University of Colorado at Boulder - School of Law
7	170	The Failure of Mandated Disclosure  Omri Ben-Shahar, Carl E. Schneider ,  University of Chicago Law School, University of Michigan Law Schoo
8	142	International Sale of Goods  Gregory M. Duhl,  William Mitchell College of Law
9	139	The Right to Withdraw in Contract Law  Omri Ben-Shahar, Eric A. Posner,  University of Chicago Law School, University of Chicago - Law School
10	132	A Critical Theory of Private Equity  Lee Harris,  University of Memphis - Cecil C. Humphreys School of Law

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic) 
February 27, 2010 to April 28, 2010

Rank	Downloads	Paper Title
1	258	A Myth Deconstructed: The 'Emperor’s New Clothes' on the Low Profit Limited Liability Company  Daniel S. Kleinberger,  William Mitchell College of Law
2	241	The Single Member Limited Liability Company as Disregarded Entity: Now You See it, Now You Don’t  Daniel S. Kleinberger, Carter G. Bishop,  William Mitchell College of Law, Suffolk University Law School
3	240	Private and Public Construction in Modern China  Gregory M. Stein,  Associate Dean for Faculty Development & Woolf, McClane, Bright, Allen & Carpenter Distinguished Professor of Law, University of Tennessee College of Law
4	232	The Low-Profit LLC (L3C): Program Related Investment by Proxy or Perversion?  Carter G. Bishop,  Suffolk University Law School
5	170	The Failure of Mandated Disclosure  Omri Ben-Shahar, Carl E. Schneider ,  University of Chicago Law School, University of Michigan Law School
6	164	Veil-Piercing  Peter B. Oh,  University of Pittsburgh - School of Law
7	139	The Right to Withdraw in Contract Law  Omri Ben-Shahar, Eric A. Posner,  University of Chicago Law School, University of Chicago - Law School
8	93	The Venn Diagram of Business Lawyering Judgments: Toward a Theory of Practical Metadisciplinarity  Jeffrey M. Lipshaw,  Suffolk University - Law School
9	83	The Scope of Fiduciary Obligations: How Contract Informs, But Does Not Determine, the Scope of Fiduciary Obligations  Mark Leeming,  University of Sydney - Faculty of Law
10	66	Principles of the Law of Software Contracts: Some Highlights  Robert A. Hillman, Maureen A. O'Rourke,  Cornell Law School, Boston University School of Law

[Jeremy Telman]

ContractsProf Blog Admits to Arbitration Exhaustion

We have been preoccupied with Rant-A-Center v. Jackson, but the Supreme Court's interest in arbitration issues is not limited to that case.  Today the court decided Stolt-Nielsen v. Animalfeeds Int'l Inc. in which the issue was whether an arbitrator can permit class-action arbitration when the arbitration agreement is silent as to the availability of that mechanism.  The court said no in a 5-3 decision that split along predictable lines, with Justice Sotomayor not participating.  If you want details you should look elsewhere.  We recommend the following blawgs:

Sarah Cole on the ADR Prof Blog

Richard Bales on the Workplace Prof Blog

If anybody has other links to recommend, please let us know and we will add them.

[Jeremy Telman]

Choice Quotations from the Rent-A-Center Arguments

Two quotations from the recent argument in Rent-A-Center West v. Jackson just call out for memorialization on this blog.  Mind you, ripped from their contexts, these quotations might seem more significant than they really are, but still. . . .

Justice Breyer: I'm not interested in arbitration law.  I am interested in contract law, and I want to know why as a general matter of contract law an allegation of unconscionability, defense of unconscionability is . . . not . . . like the coercion defense or the inducement defense or the "I was in Alaska" defense?  Isn't it enough like that that they should be treated alike? 

Justice Scalia: No, I don't care what we said in dictum.  It doesn't seem to me that unconscionability is the same as duress or the same as fraud . . . that you can be a stupid person who voluntarily signs an unconscionable contact.  Now, the courts may protect you because you are stupid, but you haven't been coerced.  Is there no distinction between unconscionability and coercion?

[Jeremy Telman]

Synopsis of the Rent-A-Center Oral Arguments

The transcript from yesterday's oral argument in Rent-A-Center West v. Jackson is available now here.  I hope that some of our arbitration experts will share their thoughts on how oral argument went.  My inexpert attempt at a synopsis follows:

Rent-A-Center's counsel, friend of the blog Robert F. Friedman, under questioning from Justices Ginsburg, Kennedy, Stevens and Sotomayor, argued that the issue in the case, unconscionability, does not relate to the "making" of an agreement.  It is a post-formation issue and thus one that can be determined by the arbitrator.  This exchange with Justice Sotomayor (on p. 7 of the transcript) strikes me as getting to the heart of things:

Justice Sotomayor:  Counsel, is your problem with unconscionability . . . being forced to or coerced into signing something?  That's okay for the courts, but this type of argument that goes to the unfairness of the process, that's for the arbitrator; is that your position?

Mr. Friedman: That's right, Justice Sotomayor. 

But Justice Scalia, who had been trying to help Mr. Friedman make his case was not buying Mr. Friedman's argument that there is a bright line separating allegations of physical coercion from allegations of substantive unfairness. Justice Scalia suggested that if argument is "that the one-sidedness [of an arbitration agreement] is evidence of that the agreement was not voluntary, I don't see how that's for the arbitrator." (p.10)

A bit later, Justice Breyer makes the distinction between clear and unmistakable language referring an issue to the arbitrator and clear and unmistakable evidence of intent to refer an issue to the arbitrator. (p. 15) Justice Breyer characterized Jackson's claim as one that there was no such intent on his part because of procedural and substantive unconscionability.  Mr. Friedman agreed with Justice Breyer that a court could decide whether there was an agreement to arbitrate in cases in which the employee's signature was forged or if the employee was intoxicated at the time he signed. (pp. 18-19)  Justice Breyer then pressed Mr. Friedman to explain why unconscionability should be treated differently from coercion, forgery or incapacity challenges to the enforcement of an agreement. (p. 20)  Mr. Friedman responded that unconscionability  claims simply did not rise to the same level as claims that a contract had never actually been made due to fraud or coercion.

There follows an interesting exchange between Justices Ginsburg and Scalia (pp. 22-23) about the effect of the court's decision in Hall Street Associates, LLC v. Mattel, Inc. on the validity of the arbitration agreement at issue in this case.  Justice Ginsburg entertained the possibility that Hall Street might require a finding that the parties' agreement was invalid.  Justice Scalia argued that the issue had not been raised below and thus was waived.  Justice Ginsburg stuck to her guns: the parties had had no opportunity to raise the issue because the Hall Street opinion was issued after the District Court decided this case.  

Plaintiff's counsel, Ian Silverberg, then had his chance.  Much of the discussion here focuses on whether Mr. Jackson was seeking to invalidate the entire arbitration agreement or only specific provisions.  Chief Justice Roberts suggested that one might say that a global challenge to the agreement goes to the making of the agreement and thus is for the court to decide, but if only specific provisions are challenged as unconscionable, that goes to enforcement and can be decided by the arbitrator.  (p. 28)  After a lengthy and very confusing exchange, Mr. Silverberg characterized his client's position as follows: "There are certain elements of the arbitration agreement that are unconscionable and under Nevada law, which would render the entire arbitration agreement unconscionable." (p. 42)  

Justice Scalia pointedly rejected Mr. Silverberg's attempt to argue that unconscionability challenges should be treated like challenges to the making of an agreement based on coercion, fraud in the inducement or duress.  "I would say all unconscionability challenges, if you have an agreement that is as clear as this one, would go to the arbitrator."  (p. 47)  A few pages later, Justice Ginsburg asked Mr. Silverberg whether all arbitration agreements could be subject to unconscionability challenges that would have to be decided by a court.  (p. 52)  When Mr. Silverberg suggested that all of them could be, Justice Scalia jumped in with "Kiss good-bye to arbitration."  But Mr. Silverberg gamely replied that his client was simply seeking to retain the status quo.  As the law now stands, parties can get before courts to argue that arbitration agreements that they have signed are unconscionable, and the heavens have not darkened.  Courts quickly dispose of meritless unconscionability challenges and have the option of sanctioning the attorneys who bring them.  (p. 53)

[Jeremy Telman]

One Judge’s Mortgage Modification Revolution

While the pols debate (or don’t debate) a bank reform bill, one judge is making headlines in New York by single-handedly taking on the banks.  And he’s done it (at least in part) with basic contract doctrine.

In Suffolk County, New York, in the Residential Mortgage Foreclosure Conference Part, Justice Jeffrey Arlen Spinner is waging his own mortgage reform revolution.  Back in November, Justice Spinner canceled a $292,500 mortgage on unconscionability grounds, describing IndyMac Bank’s behavior as “harsh, repugnant, shocking and repulsive.”  Then, just last week, he ordered the Emigrant Mortgage Company to pay $100,000 to the homeowners as compensation for the bank’s “deplorable” mortgage agreement and its bad-faith foreclosure negotiations.  The judge "forever barred" Emigrant from collecting interest on the $302,500 mortgage, as well as any legal fees, costs "or any sums other than the principal balance."  He wrote: 

The Court…determines that the imposition of exemplary damages upon [the plaintiff bank] is equitable, necessary and appropriate, both in light of Plaintiff's shockingly inequitable, bad-faith conduct, as well as to serve as an appropriate deterrent to any future outrageous, improper and wrongful activities . . .  

When Emigrant initiated the foreclosure proceeding, the homeowners contested the action, arguing that Emigrant refused to engage in good faith settlement conferences, as required by a 2008 amendment to the Banking Law.  The decision, however, focused on the provisions of the mortgage agreement, which Justice Spinner described as “inequitable.”  Among other “deplorable” and “repugnant” provisions, the agreement had a clause prohibiting the homeowners from ever seeking protection under the U.S. Bankruptcy Code.  The judge reasoned:

This Court has never been presented with such a waiver. …It is axiomatic that a pre-bankruptcy waiver of such a valuable statutory right, even if freely bargained for (and in this Court's opinion, this is certainly not the case), should not, under any circumstances, be enforced against consumer debtors. …[S]uch a highly questionable waiver as this one is unconscionable, unreasonable, overreaching and is absolutely void as against public policy.

The judge's opinions read like a punishing thesaurus entry for "very bad bank" -- he has liberally thrown around language like "deplorable," "vexatious," "repugnant," "repulsive," "harsh," even describing the bank's actions as "premeditated."  Definitely cases to watch on appeal.

[Meredith R. Miller]

Insurance Contracts: Two Duty to Defend Cases

 On April 5, 2010, the Ninth Circuit ruled in favor of Hyundai in Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh.  The case followed a patent infringement judgment against Hyundai after it placed features on its website.  In 2005, Orion IP, LLC sued Hyundai and 19 other car manufacturers for their "build your own vehicle" and parts catalogue features.  Orion holds a patent for electronic methods that generate customized product proposals for potential automobile purchasers.  Hyundai sought a defense from its insurers, claiming that Orion's suit was covered under the "advertising injury" clause in its contract with National Union.  National Union refused to provide a defense, and Hyundai eventually was found liable to Orion for $34 million in damages.  

Hyundai then filed suit against its insurer.  The district court granted summary judgment to National Union, finding among other things, that patent infringement is not an "advertising injury" as defined in the policy.  The Ninth Circuit reversed.  Hyundai claimed that Orion's claims fell under the contractual provision obligating National Union to defend Hyundai against claims alleging the "misappropriation of advertising ideas."  The Ninth Circuit first found that the challenged features constituted "advertising" for the purposes of California law.  Next, the Ninth Circuit found that while California courts had in the past rejected claims that patent infringements constituted advertising injuries, they had done so through a fact specific inquiry, acknowledging that infringement of a patented advertising method could constitute misappropriation of advertising ideas.  Finally, because the court found that the "build your own" feature was itself an infringement of Orion's patent, the use of the feature caused Orion's harm.  The court thus found a direct causal connection between the advertisement and the advertisement injury.

Meanwhile, on the same day, the Seventh Circuit decided that Ace American Insurance Company had no duty to defend RC2, the manufacturer of the Thomas & Friends toys, against class action lawsuits alleging negligence in connection with use of lead paint on RC2 toys that had been recalled. The case is Ace American Insurance Co. v. RC2 Corp., Inc.

 In this case, the policies in question excluded coverage for occurrences that took place within the United States.  The district court nonetheless rules that Ace had a duty to defend RC2 based on the theory that the policies extended coverage to injuries that occurred in the U.S. but were caused by negligence in the product's manufacture that occurred abroad.  The Seventh Circuit found that Illinois law does not permit such an extension of coverage where the policy exclusion is clear and thus reversed the district court.

RC2 had separate insurance to deal with domestic occurrences.  Unfortunately for RC2, those policies had a lead paint exclusion.  RC2 thus had to turn to its international insurer.  The Seventh Circuit held that under Illinois law "an accident occurs when and where all the factors come together at once to produce the force that inflicts injury and not where some antecedent negligence takes place."  Since the plaintiffs in the underlying litigation all alleged injury from exposure to lead paint in the United States, the claims clearly were not covered under RC2's policy with Ace.  

[Jeremy Telman]

Oral Arguments Today in Rent-A-Center West

The U.S. Supreme Court heard oral arguments this morning in Rent-A-Center West v. Jackson, a case that has occupied us for much of this month.  [Yes, I know that the picture at right does not actually represent oral argument at the U.S. Supreme Court, but it is a court and people are arguing.]

We hope that we will benefit from some post-argument analysis from some of our arbitration law experts who have already weighed in on the importance of the case in advance.

The SCOTUS blog chimed in with its preview yesterday.  More information about the case can also be found on the SCOTUSwiki.  

[Jeremy Telman]

Jeff Lipshaw Has a Question for You

Over at the Legal Profession Blog, Jeff Lipshaw has a post in which he asks the non-musical question, "Can a discussion of contract theory up front allay the usual first-year angst about consideration (and everything else)?"  

Having read Jeff's discussion, my answer to his question would be as follows: I doubt it, but there might be other reasons to set out one's theoretical approach to contracts law in advance.  I ask my students to read my casebook's theoretical introduction, which covers Socratic teaching and the case method, formalism, realism and all that jazz, giving a critical perspective on each.  I do it, not in the expectation that students will get much out of the assignment on the first reading, but it contains material to which I can refer back throughout the semester.

My own preference is to reveal my own theoretical perspectives piecemeal, when they seem relevant to particular subjects that come up throughout the course.  But I am also often cautious to present such perspectives, whether or not they are my own, as possible perspectives one might have on contracts law and contracts theory.  Because law students are so often attempting to get the "right answer" in their notes, I try to present them with possible answers and perspectives so that they are not tempted to confuse the "right answer" with my opinion.  I want them to be formulating their own approaches to the material and to give them as many perspectives as possible.  I prefer to offer theoretical approaches to them in digestible chunks, over the course of the semester, so that they can wrestle with it on their own.

It is far easier for me to adopt such an approach than it might be for Jeff because I have the advantage of not having developed a systematic approach to contracts theory.  A slipshod eclecticism is the hobgoblin of my little mind.

[Jeremy Telman]