Compucredit Corp v Greenwood
KPMG LLP v Cocchi
Marmet Healthcare Center, Inc v Brown
The Supreme Court took time out from its momentous work deciding the fate of the healthcare law and Arizona's immigration enforcement statute to issue one regular opinion and two per curiam opinions on arbitration during its 2011 term (commencing in October 2011 and extending until June 2012). All three of these opinions are discussed below.
The Supreme Court's sole regular opinion on arbitration during this period was rendered in Compucredit v Greenwood (132 S Ct 665, 2012). In Compucredit the Supreme Court reversed a Ninth Circuit decision finding that statutory claims brought under the Credit Repair Organisations Act(1) were non-arbitrable, finding that a no-waiver clause in the act was insufficiently specific to demonstrate an intent by Congress to make an exception to the Federal Arbitration Act presumption in favour of honouring arbitration agreements.(2)
Compucredit arose out of a class action complaint filed by individuals who had been offered a Visa-branded credit card marketed by Compucredit.(3) The Credit Repair Organisations Act regulates the practices of certain credit repair organisations, as defined by the Credit Repair Organisations Act, which offer services designed to improve a consumer's credit or that provide advice regarding how to improve a consumer's credit.(4) The substantive provisions of the act provide for certain requirements for contracts between covered organisations and consumers and for a consumer right to cancel.(5) The act provides a private right of action to enforce those provisions.(6) The class action complaint alleged that Compucredit and other entities involved with issuing the relevant Visa card had violated the Credit Repair Organisations Act by allegedly making misleading representations that the card could be used to rebuild poor credit and by diluting the advertised credit limit through the assessment of poorly explained fees.(7)
The individual named plaintiffs in Compucredit had submitted credit card applications that included an arbitration clause.(8) Based on that clause, Compucredit and its co-defendants moved to compel arbitration.(9) The district court denied the motion to compel arbitration on the ground that Congress intended claims under the Credit Repair Organisations Act to be non-arbitrable and the Ninth Circuit affirmed.(10) The Ninth Circuit and the district court found the Credit Repair Organisations Act claims to be non-arbitrable based upon a disclosure provision and a non-waiver provision.(11) The disclosure provision requires that all covered organisations provide consumers with a statement specifically included by Congress as part of the act, including in relevant part the following: "You have a right to sue a credit repair organization that violates the Credit Repair Organization Act."(12)
The non-waiver provision states:
"Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter – (1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person."(13)
The Ninth Circuit reasoned that because the disclosure provision provided consumers with a right to sue, which involves the right to bring an action in court, and the non-waiver provision prohibits the waiver or any right of the consumer under the Credit Repair Organisations Act, the arbitration clause could not be enforced.(14) The Supreme Court, in an opinion by Justice Scalia joined by Chief Justice Roberts and Justices Kennedy, Thomas, Breyer and Alito, reversed the Ninth Circuit on the ground that the premise that the Credit Repair Organisations Act disclosure provision provided a consumer with a right to bring an action in court was wrong.(15)
The majority opinion reasoned that the disclosure requirement created no substantive rights, but rather required only a disclosure of other rights and that, therefore, the discussion of the 'right to sue' did not create a non-waivable right.(16) Likewise, the court held that Section 1679g of the Credit Repair Organisations Act, which creates a private right of action to enforce the act, did not create non-waivable rights.(17) The opinion recited a variety of cases in which the Supreme Court had previously held statutory rights arbitrable.(18) Although the court acknowledged that none of those prior cases had concerned a statute that included a non-waiver clause such as that in the Credit Repair Organisations Act, it held that those cases demonstrate that the creation of a private right of action in a statute does not create a right to initial judicial enforcement.(19) Thus, according to the court:
- there was no statutory right to litigate in court in the first instance to be waived under the Credit Repair Organisations Act; and
- the non-waiver clause did not apply.(20)
The majority opinion went on to dismiss the argument that, absent an unwaivable right to litigate in court, the required Credit Repair Organisations Act disclosure would effectively require credit repair organisations to mislead consumers.(21) According to the court, the reference to the right to sue in the disclosure was:
"a colloquial method of communicating to consumers that they have the legal right, enforceable in court, to recover damages from credit repair organisations that violate the [the Credit Repair Organisations Act ]."(22)
As such, the court opined that most consumers would understand it as a general right to litigate without regard to whether access to court may be preceded by an arbitration proceeding.(23)
Finally, the Supreme Court pointed out that at the time the Credit Repair Organisations Act was enacted, arbitration clauses were common in consumer agreements.(24) Thus, according to the court, had Congress intended to prohibit the arbitration of claims under the Credit Repair Organisations Act, it would have done so more explicitly.(25)
Justice Sotomayor submitted a concurring opinion, joined by Justice Kagan, which agreed that statutory claims are generally subject to valid arbitration agreements unless Congress evinces a contrary intent.(26) Sotomayor continued that she believed that the argument that Congress had intended to bar arbitration through a combination of the private right of action, disclosure and non-waiver provisions in the Credit Repair Organisations Act was plausible, but that the opposite conclusion was equally plausible.(27) Thus, given that the arguments for and against arbitrability were in equipoise, the issue should be resolved in favour of arbitrability because the courts resolve doubts in favour of arbitrability.(28) The concurrence added, however, that it would not be necessary for Congress to explicitly disallow arbitration to convey its intent to do so, but that rather the intent of Congress can be determined from the history and purpose of the statute in question.(29)
Justice Ginsburg dissented, stating that the Credit Repair Organisations Act's notice provision (15 USC Section 1679c(a)), the private right of action (15 USC Section 1679g) and the waiver provision (15 USC Section 1679f) act together to "indicate Congress's intention to preclude mandatory, creditor-imposed, arbitration of [Credit Repair Organisations Act] claims."(30) The dissent points to references in the private right of action section to 'action', 'class action' and 'court', which – combined with the disclosure requirement – suggested to Justice Ginsburg that Congress intended to bar the arbitration of claims under the Credit Repair Organisations Act.(31)
In a per curiam opinion issued early in the term, KPMG LLP v Cocchi (132 S Ct 23, 2011), the Supreme Court vacated a judgment of the Florida Court of Appeal, Fourth District, which had refused to compel arbitration after a determination that two of four claims were non-arbitrable. Cocchi arose from claims brought from 19 individuals and entities that had bought interests in limited partnerships invested with Bernard Madoff.(32) The plaintiffs sued a variety of entities, including KPMG, the auditing firm for the manager of the funds.(33) The Supreme Court's opinion concerned only the claims against KPMG.(34)
The plaintiffs had alleged four causes of action against KPMG:
- negligent misrepresentation;
- violation of the Florida Deceptive and Unfair Trade Practices Act ;
- professional malpractice; and
- aiding and abetting a breach of fiduciary duty.(35)
KPMG moved to compel arbitration based on the audit services agreement it had with the fund manager.(36) The Florida Circuit Court denied the motion and the appellate court affirmed.(37) The appellate court's reasoning was that as none of the plaintiffs had directly assented to the arbitration clause, the clause could be enforced against them only if their claims were derivative, in that they arose from the services that KPMG performed for the fund managers under the audit services agreement.(38) The Florida Court of Appeal concluded that both the negligent misrepresentation and the Florida Deceptive and Unfair Trade Practices Act claims were direct rather than derivative, and thus denied arbitration.(39)
The Supreme Court observed that the Florida Court of Appeals had made no determination about the other two claims for professional malpractice and aiding and abetting a breach of fiduciary duty.(40) The Supreme Court vacated the ruling because the Federal Arbitration Act:
"leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed."(41)
Thus, the Supreme Court continued:
"When a complaint contains both arbitrable and non-arbitrable claims, the Act requires courts to compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result will be the possibly inefficient maintenance of separate proceedings in different forums."(42)
The Supreme Court's holding in Cocchi that the emphatic federal policy in favour of arbitration requires courts to compel arbitration even where the result may be increased inefficiency is not, in itself, controversial, but nonetheless strongly contrasts to the Supreme Court's statements regarding the goals of the Federal Arbitration Act in AT&T Mobility LLC v Concepcion just one term before. The majority opinion in Concepcion emphasised efficiency as the primary goal of the Federal Arbitration Act:
"The overarching purpose of the [Federal Arbitration Act], evident in the text of [Sections] 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the [Federal Arbitration Act]."(43)
In Cocchi the Supreme Court opined that efficiency must step aside for the Federal Arbitration Act. It remains to be seen how the Supreme Court will reconcile these two different lines of reasoning.(44)
Marmet Healthcare Center, Inc v Brown
In a second per curiam opinion in Marmet Healthcare Center, Inc v Brown (132 S Ct 1201, 2012), the Supreme Court vacated a decision of the Supreme Court of Appeals of West Virginia holding that, as a matter of public policy in West Virginia, all pre-dispute arbitration agreements that apply to claims alleging personal injury or wrongful death against nursing homes were invalid.(45)
The Marmet decision arose from three negligence and wrongful death suits against nursing homes in West Virginia, in each of which a relative had signed a nursing home agreement containing an arbitration clause on behalf of the patient.(46) The West Virginia court held the arbitration clauses in the subject agreements unenforceable as a matter of public policy.(47) The West Virginia court considered whether the Federal Arbitration Act pre-empted West Virginia public policy with respect to the arbitration clauses, and concluded that it did not because the US Supreme Court's interpretation of the Federal Arbitration Act was "tendentious" and "created from whole cloth".(48) The West Virginia court thus independently determined that:
"Congress did not intend for the [Federal Arbitration Act] to be, in any way, applicable to personal injury or wrongful death suits that only collaterally derive from a written agreement that evidences a transaction affecting interstate commerce, particularly where that agreement involves a service that is a practical necessity for members of the public."(49)
The West Virginia court thus concluded that the Federal Arbitration Act did not pre-empt West Virginia's public policy against pre-dispute arbitration agreements that apply to wrongful death or personal injury against nursing homes.(50)
The Supreme Court disagreed, stating: "[A]s this Court reaffirmed last Term 'when state law prohibits outright the arbitration of a certain type of claim, the analysis is straightforward: The Confiicting rule is displaced by the FAA'."(51)
The court's per curiam opinion concluded that West Virginia's preclusion of arbitration for nursing home-related negligence claims is precisely the kind of categorical rule that is pre-empted by the Federal Arbitration Act .(52)
Interestingly, however, the Supreme Court in Marmet did not completely preclude the West Virginia Court's alternative ruling that the arbitration clauses at issue were unconscionable under state law.(53) Rather, the Supreme Court remanded that issue back to the West Virginia court for determination of whether the arbitration clauses are unconscionable under state common law principles not specific to arbitration without influence from the state court's categorical rule.(54) On remand, the Supreme Court of Appeals of West Virginia accepted the Supreme Court's ruling and overruled the section of its prior opinion to which the Supreme Court had objected.(55) Nonetheless, with the observation that "[a]greements to arbitrate must contain 'at least a modicum of bilaterality' to avoid unconscionability", the West Virginia court remanded the three underlying actions to the trial court for further proceedings on whether the individual contracts should be held unconscionable under the circumstances.(56)
For further information on this topic please contact Sherman Kahn at Morrison & Foerster LLP by telephone (+1 202 887 1500), fax (+1 202 887 0763) or email ([email protected]).
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Endnotes
(1) 15 USC Sections 1679 and following.
(2) Compucredit Corp, 132 S Ct at 672-673.
(7) Id. The dissent provides a more complete explanation of the plaintiffs' allegations. 132 S Ct at 676-77.
(12) Id. The Supreme Court's opinion includes the entire required statement as an appendix. 132 S Ct at 673-74.
(13) 132 S Ct at 669, citing 15 USC Section 1679f(a).
(18) 132 S Ct at 670-71, citing, Gilmer v Interstate/Johnson Lane Corp, 111 S. Ct. 1647 (1991) (enforcing arbitration agreement with respect to a claim under the Age Discrimination in Employment Act of 1967), Shearson/American Express, Inc v McMahon, 107 S Ct 2332 (1987) (enforcing arbitration agreement with respect to a claim under the Racketeer Influenced and Corrupt Organisations Act); and Mitsubishi Motors Corp v Soler Chrysler Plymouth, Inc, 105 S Ct 3346 (1985) (enforcing arbitration agreement with respect to a claim under the Clayton Act).
(41) 132 S Ct at 25-26 (emphasis in the original), quoting Dean Witter Reynolds Inc v Byrd, 105 S Ct 1238, 1241 (1985). The Florida Court of Appeal has already acted upon the remand in Cocchi, directing the circuit court to compel arbitration of the two remaining claims if they remain in the case. KPMG LLP v Cocchi, 2012 Fla App LEXIS 6886 (2012). On remand, the plaintiffs alleged that the issue of the two remaining claims was moot as those claims had been dismissed, but KPMG disputed whether the claims had, in fact, been completely dismissed. Id.
(42) 132 S Ct at 25-26, again quoting Dean Witter, 105 S Ct at 1241.
(43) AT&T Mobility LLC v Concepcion, 131 S Ct 1740, 1748 (2011).
(48) Id, quoting Brown v Genesis Healthcare Corp, No 35494, 724 SE 2d 250 (W Va 2011).
(51) Id, quoting AT&T Mobility LLC v Concepcion, 131 S Ct 1740, 1747 (2011).
(55) Brown v Genesis Healthcare Corp, 729 SE 2d 217, 225 (W Va 2012).
