February 06, 2012
Three Arbitration Decisions Part III: Third Circuit Enforces Arbitration Clause Even Though Arbitral Body Is Unavailable
Raheel Ahmad Khan bought a Dell 600m computer in 2004. He alleges that, due to design defects, the computer would overheat and fry its motherboard (non-fried motherboard is pictured above). This happened three times and Dell replaced the computer three times, but after that, Dell told Mr. Khan that he was on his own, as the warranty had expired. Nice. As it turns out, Mr. Khan may be a frequent filer in addition to being a frequent fryer. He filed a putative class action in July 2009, alleging consumer fraud, breach of warranty, common law fraud, negligent misrepresentation and unjust enrichment.
The terms and conditions that came with Mr. Khan’s computer provided for binding arbitration with the National Arbitration Forum (NAF). However, by the time Mr. Khan brought his suit, the NAF had been barred by a consent judgment from accepting consumer arbitrations because it had been found to have engaged in “various deceptive practices.” Dell nonetheless moved to compel arbitration in some other forum. The District Court denied Dell’s motion to compel arbitration and for the appointment of a special arbiter, finding that it could not compel parties to submit to an arbitral forum to which they had not agreed.
In Khan v. Dell, Inc., a split panel of the Third Circuit held that a class of consumers is bound by the arbitration agreement in their purchase agreement even though the arbitral body designated in the agreement is no longer available.
The case turned on Section 5 of the Federal Arbitration Act, which permits a court to appoint a substitute arbitral body unless the named body is “integral” to the arbitration provision. The key contract language provides that all disputes “SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM.” The Court found that language ambiguous, as the word “exclusively” could be read to relate to “binding arbitration” to the NAF or to both. Courts treating the language had split on the intended scope of “exclusively.” Because of the federal policy in favor of arbitration, the Court decided that a tie goes to the runner (from court), in this case Dell.
Judge Sloviter, dissenting, found no ambiguity in the arbitration agreement. To Judge Sloviter, the NAF was the designated exclusive arbitrator, and that should have meant that the court could not dictate to the parties whither to send them for arbitration. Judge Sloviter noted that the NAF is no longer allowed to accept new consumer arbitrations because it had chosen to enter into a consent judgment rather than dispute claims that it routinely appointed anti-consumer arbitrators and discontinued referrals to arbitrators who decided cases in favor of consumers. Having thrown in its lot with the NAF, Judge Sloviter agreed with the District Court that Dell should not get another shot at picking an arbitrator.
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