Trial News

Four recent decisions in courts across the country have demonstrated the limits to forced arbitration agreements when interpreted under common law contract principles. The Supreme Court of West Virginia, the Western District of Washington, and North Carolina’s intermediate appellate court all rejected defense arguments to compel arbitration based on various grounds related to contract law. The decisions cover a range of areas—car loans, nursing homes, and Amazon’s Alexa smart home speaker. (TD Auto Finance LLC v. Reynolds, 2020 WL 1844693 (W. Va. Apr. 10, 2020); Gay v. Saber Healthcare Grp., L.L.C., 2020 WL 1918812 (N.C. App. Ct. Apr. 21, 2020); Register v. Wrightsville Health Holdings, LLC, 2020 WL 2121308 (N.C. App. Ct. May 5, 2020); B.F. and A.A. by and through Fields v. Amazon.com Inc., 2020 WL 1808908 (W.D. Wash. Apr. 9, 2020).)

In TD Auto Finance LLC v. Reynolds, the plaintiffs purchased a car through a Retail Installment Sales Contract (RISC) that assigned the contract from the car dealer to defendant TD Auto Finance, which issued the plaintiffs’ loan. The RISC also contained a merger clause stating that the “contract contains the entire agreement between you and us relating to this contract. Any change to this contract must be in writing and we must sign it.” Before the plaintiffs signed the contract, they had submitted a credit application that allowed the car dealer to search for and pair them with the loan company that offered the best terms. That credit application contained a forced arbitration agreement.

The plaintiffs alleged that when they defaulted on the loan, they were harassed over the phone by collection agencies working on TD Auto Finance’s behalf. They sued TD and the collection agencies, asserting violations of the West Virginia Consumer Credit and Protection Act, and the defendants moved to compel arbitration.

The trial court denied the motion, finding that because the arbitration agreement was contained in the credit application only and preceded the purchase of the car, it was part of a separate transaction from the RISC. Since the arbitration agreement was not signed contemporaneously with the RISC or incorporated by reference in the merger clause, the motion to compel could not succeed.

The defendants appealed, and the state supreme court affirmed. The court explained that although it generally has found that documents signed contemporaneously form a single transaction, it had previously not assessed the effect of a merger clause. Even though the two documents were signed on the same day, the court didn’t consider the credit application to be contemporaneous with the RISC. It concluded that the credit application was signed before the RISC and was not part of the purchase transaction because it applied to entirely different subject matter. Even if the credit application were a prerequisite to buying the car, its purpose was distinct.

The court explained that the merger clause in the RISC made the “four corners” of that contract all that binds the parties, so the RISC would have had to incorporate by reference the credit application’s arbitration agreement for it to continue to apply.

Charleston, W.Va., attorney Raymond Franks, who represented the plaintiffs, said of the ruling, “Consumers can rest a little easier when they’re buying a car or truck from a dealership, knowing that the plethora of documents thrust before them to sign are less likely to alter the terms of the standard RISC, thus preserving the right to have their complaints heard by a judge and jury if there are issues with the vehicle’s financing or if debt collectors hound them in violation of the law.”

Franks also noted how the court’s decision fits into the landscape of other forced arbitration rulings in the country. “The opinion in our West Virginia case is in line with the developing majority view across the country, and it is more cogently and thoroughly reasoned than those in the minority camp of courts that have reached a different result. For those reasons, it should serve as an anchor for courts in other jurisdictions yet to decide the same issue or a similar one. More generally, the opinion emphasizes the fundamental point that even federally favored, broad arbitration clauses are enforceable only insofar as permitted by established precepts of state contract law.”

In North Carolina, the state appellate court affirmed denials of motions to compel arbitration in two cases involving nursing home negligence and wrongful death on the grounds that the defendants could not establish that valid arbitration agreements existed in the residents’ admissions paperwork.

In Gay v. Saber Healthcare Group, L.L.C., the appellate court held that the arbitration agreement contained on a signature page was ambiguous and therefore must be construed in favor of the non-drafting party under common law contract interpretation principles. When Joan Franklin moved into the defendants’ facility, one of her daughters signed the admissions paperwork. She signed a page referencing a forced arbitration agreement but never received a copy of the agreement—even after several requests. The defendants did not provide a copy of the agreement at trial, and the only evidence of one was the signature page the plaintiff provided.

The signature page entered into evidence said only that the parties agreed to forgo “the constitutional right to have any claim decided in a court of law before a judge and a jury.” However, the admissions form included language that said the parties waived all rights to a jury trial but expressly preserved the right to a bench trial. “The admission agreement’s clause expressly reserving the right to a bench trial cannot be read in harmony with the arbitration agreement’s clause expressly foreclosing the same,” the court explained. It concluded that this internal conflict meant that no valid agreement to arbitrate existed because the terms were ambiguous as to whether a claim could be heard in a court of law.

Raleigh, N.C., attorney Rachel Fuerst, who represents the plaintiff, said, “This case highlights the often forgotten need to listen and tell your clients’ story. Without digging deep into how this arbitration agreement was obtained, we would not have learned that the resident’s family was made to sign on an iPad signature line without being given the opportunity to read the arbitration agreement, even though that was requested repeatedly.”

In the second North Carolina case, Register v. Wrightsville Health Holdings, LLC (in which Saber Healthcare is also named), the defendants moved to compel arbitration based on an agreement the resident’s daughter signed when he was admitted. During the discovery phase, however, they withdrew the motion to compel, and the parties began preparing for trial. More than 15 months later, the defendants attempted to compel arbitration again after retaining new counsel. The trial court denied the motion, finding that the defendants had not met their burden of establishing that a valid and enforceable arbitration agreement existed. The court also found that the defendants’ withdrawal of their initial motion to compel, as well as the delay in reasserting it, caused significant expense and prejudice to the plaintiff, constituting a waiver of their right to arbitrate.

The appellate court affirmed, finding that the defendants failed to demonstrate the plaintiff’s assent to the agreement, which is “an essential element of a valid contract.” The court ruled that affidavits the plaintiff submitted disputing whether an arbitration agreement had been signed were properly admitted, noting that the defendants failed to produce the arbitration agreement itself or any rebuttal to those affidavits. The court also rejected the defendants’ arguments that public policy favors arbitration because that still “depends on a predicate finding” that an agreement exists. “Defendants’ lengthy appeals to public policy therefore put the cart before the horse,” the court said. “Policy plays no part in the trial court’s otherwise routine determination of whether there is a valid contract at all.”

Fuerst, who also represented the plaintiff in this case, also pointed out that “there are many federal and state public policy cases in favor of arbitration. That is often the first argument of most nursing home companies. Many states, including North Carolina, require that a party first prove the existence of a binding arbitration agreement before reaching public policy arguments. Until appellate courts are ready and willing to recognize that the fiduciary duty that doctors owe their patients should be the same fiduciary duty that nursing homes owe their patients, the most direct path to challenging an arbitration agreement remains a traditional contractual challenge.”

State courts are not the only ones shooting down arbitration agreements. In the Western District of Washington, the federal court denied a motion to compel arbitration in a proposed class action involving breach of privacy allegations against Amazon for recording and storing recordings of minor children who used their parents’ Alexa smart speaker. The states where the plaintiffs reside require consent for audio recordings, and the plaintiffs argue that their parents’ acceptance of Amazon’s terms and conditions does not extend to them.

In an October report, a magistrate judge recommended denying Amazon’s motion to compel arbitration: Even though the parents consented to Amazon’s terms of use, their children did not, and the close relationship between the two is not enough to import that consent to the minor children. The judge agreed, rejecting Amazon’s argument that equitable estoppel applies because the children “knowingly exploited” the terms of the contract by receiving a “direct benefit” from using Alexa. The court determined that the children received at most an indirect benefit from their parents’ agreement with Amazon by enjoying use of the device and that this is not enough to trigger equitable estoppel. “Because Plaintiffs did not ‘knowingly exploit’ the agreements containing the arbitration clauses, they cannot be equitably estopped from avoiding them,” the court stated in its order.

The court also was not persuaded that a non-signatory to an agreement can be bound to it under contract principles, regardless of how closely associated the non-signatory is to a signing party. The court concluded that “if Amazon wanted to include a provision in the agreement requiring parents to consent to arbitration on behalf of their minor children, it could have done so.” Amazon filed an appeal of the ruling with the Ninth Circuit on April 28.

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