What is a “reasoned award” in arbitration - Houston Court of Appeal panel splits three ways on issue of first impression in review of arbitral award

Stages Stores, Inc. v Gunnerson, 

No. 01-13-00708-CV (Tex.App.- Houston [1st Dist.] Oct. 8, 2015)(op on reh'g)

Court's Opinion in Stages Stores, Inc. v, Gunnerson

 
A Houston Court of Appeals panel, on motion for rehearing, today handed down three opinions in appeal and cross-appeal of trial court's ruling on competing motion to confirm and set aside an arbitration award in an employment dispute. 

The authors of majority opinion, concurrence, and dissent disagree on meaning of "reasoned award" in dispute over whether arbitrator properly performed responsibility of resolving the case. The majority decides to reverse confirmation of the arbitral award and remand the case to the court below with instructions to the trial court to send the case back to the arbitrator to further address one particular issue raised by the defense. 
  
Justice Keyes wrote a vigorous dissent, arguing that the majority's approach, by heightening judicial review of arbitral decisionmaking and increasing the scrutiny of awards, thwarts the very rationale of arbitration, which is supposed to result in less costly, less formal, and more expeditious resolution of disputes. This case has already been dealt with in arbitration, in the trial court, in the court of appeals, and no end is yet in sight. Since the FAA is involved, it might even make it all the way to the U.S. Supreme Court. 

DISSENTING OPINION 

Opinion issued October 8, 2015

In The

Court of Appeals

For The

First District of Texas

————————————

NO. 01-13-00708-CV

———————————

STAGE STORES, INC., Appellant

V.

JON GUNNERSON, Appellee

On Appeal from the 61st District Court

Harris County, Texas

Trial Court Case No. 2013-21878

DISSENTING OPINION

I respectfully dissent. This case construes, as a matter of first impression in
Texas state court, the standards for a “reasoned award” in arbitrations brought
under the Federal Arbitration Act (FAA). See 9 U.S.C. §§ 1–16.

 I believe the majority’s decision to
reverse and remand this case is contrary to the controlling federal authority that the
lead opinion relies upon and purports to follow. I believe the award is sufficient to
satisfy the standards of a reasoned award under the FAA and that it is a mistake to
send this case back to the arbitrator to address her rejection of one of appellant
Stage Stores, Inc.’s defenses in making her award. Both the lead opinion and the
concurrence mistake an argument, which need not be addressed in a reasoned
award, and an issue, which must be disposed of in a reasoned award—as was done
here. In my view, affirmance of the arbitration award is the natural result of the
argument from federal authority relied upon in the lead opinion and the natural
holding under controlling federal authority. It is the disposition that is incorrect.
I would affirm the trial court’s confirmation of the arbitration award.

Background

Following an arbitration of an employment dispute between Stage Stores
and former employee, appellee Jon Gunnerson, the arbitrator issued a reasoned
award disposing of Gunnerson’s claim that Stage Store’s wrongfully refused to pay
benefits due to him based on his “good reason” for terminating his employment
contract. The lead opinion sets out the four specific rulings made by the arbitrator:
(1) that a valid contract existed between the parties; (2) that Stage’s
“actions in restructuring the organization and removing [Gunnerson]
from a direct reporting relationship to the CEO diminished
[Gunnerson’s] status, thereby allowing [Gunnerson] to terminate his
position for good reason pursuant to paragraph 4 of the Agreement”;
(3) that Gunnerson was entitled to recover attorneys’ fees; and (4) that

Gunnerson “failed to meet his burden of proof regarding the present
value of future stock options.” Slip Op. at 5.

Stage Stores applied to vacate this arbitration award, essentially arguing that,
in failing to specifically address each of its defenses to Gunnerson’s claim, the
arbitrator exceeded her powers or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter submitted was not made. See Slip
Op. at 7 (citing 9 U.S.C. § 10(a)(4)). The trial court denied Stage’s application
seeking to vacate the arbitration award and granted Gunnerson’s application to
confirm the award.

Discussion

Stage Stores complains that the arbitrator failed to mention one of its
defenses in the award, namely that the contract at issue required notice of the
grounds supporting good reason and an opportunity to cure before Gunnerson’s
contract could be terminated. It contends that, under the doctrine of functus officio,
which declares that arbitral judgments must be complete, it is entitled to a new
arbitral proceeding. The panel concludes that it “cannot fill in this gap for the
arbitrator,” but that it “can, however, have the trial court remand it to the arbitrator
to decide an issue which was raised but not completely adjudicated by the original
award.” Slip Op. at 28–29 (emphasis added).

I would hold that the parties raised no issue that the arbitrator did not
completely decide. Only a defense was not mentioned, and that defense was
necessarily rejected by the disposition of the encompassing issue. The arbitrator
did dispose of the issue raised by Stage Stores. She stated in the arbitration award
that Gunnerson was “allow[ed] to terminate his position for good reason pursuant
to paragraph 4 of the Agreement,” and she set out that Gunnerson was entitled to
receive his attorney’s fees but that he failed to meet his burden of proof regarding
the present value of stock purchases. The issue of whether he was allowed to
terminate his position has been completely decided, and there is no basis for
returning this case to the arbitrator.

Stage Stores’ real complaint is that the arbitrator did not specifically address
an argument—not the issue requiring resolution. And this assertion is insufficient
to establish that that arbitrator “exceeded [her] powers, or so imperfectly executed
them that a mutual, final, and definite award upon the subject matter submitted was
not made,” as required to vacate the award here. See 9 U.S.C. § 10(a)(4). By
deciding the actual issue submitted—i.e., that Stage Stores’ “actions in
restructuring the organization and removing [Gunnerson] from a direct reporting
relationship to the CEO diminished [Gunnerson’s] status, allow[ed] [him] to
terminate his position for good reason pursuant to paragraph 4 of the
Agreement”—the arbitrator necessarily decided Stage Stores’ defenses challenging

Gunnerson’s showing of good cause for termination. Nothing can be added to the
award to make it complete by sending it back to the arbitrator to hear a defense she
has already heard and rejected—as the lead opinion acknowledges.
Remand in this case is, in my view, directly contrary to the spirit and
purpose of the FAA, the federal case law construing reasoned arbitral awards, and
the functus officio doctrine the lead opinion seeks to apply. None of the law cited
in the lead opinion supports returning a case to the arbitrator to address each
argument made by the parties. Rather, all of the cases cited in the opinion hold to
the contrary. In my view, Stage Stores’ argument is identical to the type of
challenge to a reasoned award in federal arbitration that controlling federal
opinions have consistently found to be without merit. I disagree, therefore, that
remand is supported by the law controlling reasoned awards subject to the FAA.
The functus officio doctrine is the “rule that bars an arbitrator from revisiting
the merits of an award once the award has been issued.” Brown v. Witco Corp.,
340 F.3d 209, 218 (5th Cir. 2003) (cited in lead opinion, Slip Op. at 10–11). The
exceptions are limited. An arbitrator can (1) correct a mistake which is apparent on
the face of his award; (2) decide an issue which has been submitted but which has
not been completely adjudicated by the original award; or (3) clarify or construe an
arbitration award that seems complete but proves to be ambiguous in its scope and
implementation. Id. at 219. In Brown, the Fifth Circuit added that, “in the absence
of any contractual provision or formal arbitration rule expressly to the contrary,”
an arbitrator “may exercise his power to clarify the terms of an award when he is
asked to do so by parties mutually and without any party’s objection within a
reasonable period of time.” Id. None of these circumstances applies here. The
reasoned award requested by the parties and made by the arbitrator presents no
mistake on its face, decides each issue submitted, and contains no ambiguity that
prevents its being readily implemented. Therefore, the circumstances requiring
remand to the arbitrator under exceptions to the functus officio doctrine as
enunciated in Brown do not exist.

The Eleventh Circuit in Cat Charter, LLC v. Schurtenberger—a case
likewise relied upon in the lead opinion—described the requirements of a reasoned
award. It stated, “Logically, the varying forms of awards may be considered along
a ‘spectrum of increasingly reasoned awards,’ with a ‘standard award’ requiring
the least explanation and ‘findings of fact and conclusions of law’ requiring the
most,” so that “a ‘reasoned award is something short of findings and conclusions
but more than a simple result.’” 646 F.3d 836, 844 (11th Cir. 2011) (quoting
Sarofim v. Trust Co. of the W., 440 F.3d 213, 215 n.1 (5th Cir. 2006)); see also
Rain CII Carbon, LLC v. ConocoPhillips Co., 674 F.3d 469, 473 (5th Cir. 2012)
(accord). Thus, the Cat Charter court concluded, “Strictly speaking, then, a
listing or mention of expressions or statements offered as a justification of an act—
the ‘act’ here being, of course, the decision of the [arbitration] Panel.” 646 F.3d at
844 (emphasis in original.)

In Cat Carter, the appellate court refused to return the case to the arbitrator
in response to the defendants’ complaint that the award’s statement that the
plaintiffs had proved their claims “by the greater weight of the evidence” added no
explanatory value to the award “on what is most certainly a ‘bare’ or ‘standard’
award.” Id. The court held, to the contrary, that the arbitrators’ statement in the
award was “greater than what is required in a ‘standard award,’ and that is all we
need decide.’” Id. at 845. It pointed out that if the parties had wanted a greater
explanation they could have requested findings of fact and conclusions of law, but
they did not. Id. The Cat Charter court concluded:

We decline to narrowly interpret what constitutes a reasoned award to
overturn an otherwise apparently seamless proceeding. The parties
received precisely what they bargained for—a speedy, fair resolution
of a discrete controversy by an impartial panel of arbitrators skilled in
the relevant areas of the law. To vacate the Award and remand for an
entirely new proceeding would insufficiently respect the value of
arbitration and inject the courts further into the arbitration process
than Congress has mandated.
Id. at 846.

The Fifth Circuit cited this conclusion approvingly in Rain CII Carbon,
which is also relied upon by the lead opinion. 674 F.3d at 473–74. In both Rain CII
Carbon and Cat Charter, the federal circuit court construed federal arbitration law
and found an award that minimally addressed the issues sufficient to withstand a
party’s request for vacatur. See Rain CII Carbon, 674 F.3d at 474 (holding
sufficient for reasoned award “the arbitrator’s statement that, based upon all of the
evidence, he found that the initial price formula should remain in effect” after
delineating in previous paragraph “that Conoco had failed to show that the initial
formula failed to yield market price, a contention that the arbitrator obviously
accepted”); Cat Charter, 646 F.3d at 840–41, 845 (holding sufficient reasoned
award that declared that claimants had proven their Deceptive and Unfair Trade
Practices and breach of contract claim “by the greater weight of the evidence,” that
held that claimants were substantially prevailing parties and respondents were not,
awarded claimants their attorney’s fees, ordered respondents to “jointly and
severally pay” claimants specified damages, fees, costs, and interest, and granted
plaintiffs lien on boat).

The Sixth Circuit, like the Cat Charter court, refused to overturn the award
and to return the case to the arbitrator for clarification, finding that the arbitrator
“minimally satisfied the explanation requirement stated in the arbitration
agreement” by stating, with respect to each of the plaintiff’s three claims that the
plaintiff “has not met his burden of proof.” Green v. Ameritech Corp., 200 F.3d
967, 971, 977–78 (6th Cir. 2000).

By contrast to these cases holding that the requirements for a reasoned
award were satisfied, the Fifth Circuit declined jurisdiction over the trial court’s
order sending a case back to the arbitrators under the functus officio doctrine to
complete the task assigned them in a case where the award issued by the arbitral
panel was “patently ambiguous.” Murchison Capital Partners v. Nuance
Commc’ns, Inc., 760 F.3d 418, 423 (5th Cir. 2014) (stating, where trial court
returned case to arbitrators to determine whether part of determination made in
award was related only to benefit-of-the-bargain damages request of party or also
to out-of-pocket losses, that “declining jurisdiction over the district court’s order
and permitting the arbitration panel to clarify its award is necessary given our
deferential standard of review of arbitration awards”).

Here, there is no assertion of ambiguity, nor could there be. The arbitrator
clearly and expressly found “good reason pursuant to paragraph 4 of the
Agreement” for Gunnerson to terminate his position due to Stage Stores’ “actions
in restructuring the organization and removing him from a direct reporting
relationship to the CEO,” and awarded him his attorney’s fees. There is nothing to
clarify with respect to Stage Stores’ defense of notice and opportunity to cure and
nothing to add: the arbitrator rejected Stage Stores’ defense as grounds preventing
Gunnerson from terminating the contract, and it deemed him a prevailing party
entitled to attorneys’ fees. There is thus no basis for applying the exception to the
functus officio doctrine for lack of complete adjudication. The award completely
disposes of the termination issue.

In my view, it is clear that the arbitrator did enough in this case and that
there are no grounds for sending it back to the arbitrator under the ambiguity or
lack of clarity exceptions to the functus officio doctrine. The reasoned award at
issue is at least as comprehensive and detailed as the arbitral awards at issue in
Rain CII Carbon, Cat Charter, and Green. None of those cases sent a completely
decided arbitration award addressing every submitted issue back to the arbitrator
for a second attempt at arbitration, and none required that every argument or
defensive theory—as opposed to every issue—be disposed of. Indeed, one must
seriously question—as the federal courts that decided these federal arbitration law
cases did—what purpose is served by remand other than to introduce into
arbitration the same lengthy and costly court procedures that the parties sought to
avoid by agreeing to arbitration. And, worse, in this case, either the arbitrator will
reach a completely different result on the same facts or the arbitrator will reach the
same results, resulting in duplicative litigation. In neither case will the losing party
have recourse to the courts to second-guess the arbitrator’s second-time-around
decision, unless the state trial judge or appellate panel decides that the law was not
sufficiently explained to satisfy its own independent standards of review and sends
it back for the arbitrator to try yet again to satisfy the state courts on the federal
legal issues of sufficiency of the reasoned award.

The Eleventh Circuit set out in Cat Charter exactly why a reviewing court
should not require the detailed findings and conclusions of law the majority
imposes on the arbitrator in this case when the parties have merely requested a
reasoned award. The court stated:

Our conclusion today holds consistent with the general review
principles embodied in the FAA. The Supreme Court has read §§ 9-11
of the FAA as substantiating a national policy favoring arbitration
with just the limited review needed to maintain
arbitration’s essential virtue of resolving disputes
straightaway. Any other reading opens the door to the
full-bore legal and evidentiary appeals that can render
informal arbitration merely a prelude to a more
cumbersome and time-consuming judicial review
process, and bring arbitration theory to grief in the postarbitration
process.

Cat Charter, 646 F.3d at 845 (quoting Hall Street Assocs., LLC v. Mattel, Inc., 552
U.S. 576, 588, 128 S. Ct. 1396, 1405 (2008) (citations and internal quotation marks
omitted)).

To send this case back to the arbitrator is, to me, to pervert the ends of
federal arbitration as stated by the United States Supreme Court in Hall Street v.
Mattel, and as recognized by the Eleventh Circuit in Cat Charter, and to impose on
arbitrations subject to the FAA heightened state court standards of review of
reasoned arbitration awards that are clearly improper under, and superseded by,
controlling federal law. I, therefore, cannot join either the lead opinion or the
judgment of the majority. Much less can I join the concurrence, which would
require even more of the arbitrator for every reasoned award.

Conclusion

I would affirm the arbitration award.

Evelyn V. Keyes
Justice

Panel consists of Justices Keyes, Higley, and Brown.
Justice Brown, joining the majority and concurring.
Justice Keyes, dissenting.

Consumer Financial Protection Bureau wants to prevent financial services companies from using arbitration agreement to shield themselves from class actions

The benefits of the proposals would include:

• A day in court for consumers: The proposals under consideration would give consumers their day in court to hold companies accountable for wrongdoing.Often the harm to an individual consumer may be too small to make it practical to pursue litigation, even where the overall harm to consumers is significant. Previous CFPB survey results reported that only around 2 percent of consumers surveyed would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. In cases involving small injuries of anything less than a few thousand dollars, it can be difficult for a consumer to find a lawyer to handle their case. Congress and the courts developed class litigation procedures in part to address concerns like these. With group lawsuits, consumers have opportunities to obtain relief they otherwise might not get.
• Deterrent effect: The proposals under consideration would incentivize companies to comply with the law to avoid lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.
• Increased transparency: The proposals under consideration would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit the claims filed and awards issued in arbitration to the CFPB. This would enable the CFPB to better understand and monitor arbitration cases. The proposal under consideration to publish the claims filed and awards issued on the CFPB’s website would further increase transparency.

In addition to consulting with small business representatives, the Bureau will continue to seek input from the public, consumer groups, industry, and other stakeholders before continuing with the process of a rulemaking. When the Bureau issues proposed regulations, the public is invited to submit written comments which will be carefully considered before final regulations are issued.

An outline of the proposals under consideration is available at:http://www.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf

A list of questions on which the Bureau will seek input from the small business representatives providing feedback to the Small Business Review Panel will be available on Wednesday at:http://www.consumerfinance.gov/f/201510_cfpb_small-business-representatives-providing-feedback-to-the-small-business-review-panel.pdf

The March 2015 report on arbitration is available at:http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/

A factsheet summarizing the Small Business Review Panel process can be found at: http://www.consumerfinance.gov/f/201510_cfpb_fact-sheet-small-business-review-panel-process.pdf

Prepared Remarks of Richard CordrayDirector, Consumer Financial Protection Bureau

Field Hearing on Arbitration

Denver, Colo.October 7, 2015

Thank you all for joining us in Denver today.  We are here to talk about something important that is often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts.  It is called an arbitration clause, or more precisely, a mandatory pre-dispute arbitration clause.  If you do not know what an arbitration clause is, you are just like the vast majority of American consumers.

Companies use this clause, in particular, to block class action lawsuits.  They thus provide themselves with a free pass from being held accountable by their customers.  That free pass is secured by making sure their customers cannot group together to seek relief for wrongdoing.  Many violations of consumer financial law involve relatively small amounts of money for the individual victim.  Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.  At the Consumer Financial Protection Bureau, we estimate that this free pass affects tens of millions of consumers.

To understand this issue more plainly, we can look at a hypothetical example based on real-world consumer experiences.  Maria and Kate (their names are fictitious) are customers at two different banks, and both are beginning to rack up unexpected overdraft fees on their checking accounts.  It turns out that their banks are processing transactions in unexpected ways that increase the number of overdraft fees and without ever clearly explaining what they are doing.  These practices cost Maria and Kate at most a few hundred dollars each.  But they have earned the banks hundreds of millions of dollars across many customers.

After consulting lawyers, Maria and Kate are told that similar practices have been found to be illegal at another bank, but it would not make economic sense to sue just to recover the small amount each of them has been overcharged.  Maria and Kate could call their banks and demand a refund, but there is no guarantee they would get their money back.  Even if they managed to do so, the same practices would continue to affect others.  So Maria and Kate each agree to sue their banks, not just on behalf of themselves, but on behalf of all the other consumers who were victimized in the same way.

Maria succeeds in bringing a group claim and obtaining a settlement with her bank on behalf of two million customers.  As a group, the customers are eligible to receive upwards of a $100 million refund for the fees they were wrongfully charged, and their bank agrees to change its practices so these harms cannot continue.  By contrast, Kate’s lawsuit is dismissed.  So far as we know, Kate gets nothing for herself and the other customers of the bank are left without relief, despite the fact that her bank engaged in similar practices and used similar disclosures.  The difference is that Kate’s bank had an arbitration clause that gave it a free pass from her efforts to pursue relief by blocking her group claims.

By simply invoking the magic words of the arbitration clause, Kate’s bank could avoid being held to account for its actions.  The only option for customers at Kate’s bank was to bring their own individual arbitration cases for such relatively small amounts that it would be impractical to pursue them.  In addition, the results of any such arbitration cases would never be revealed to the general public.

The dramatically different experiences of these two consumers illustrate how companies have been able to use this little-known clause to rig the game against their customers.  Group lawsuits can result in substantial relief for many consumers and create the leverage to bring about much-needed changes in business practices.  But by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.

***

Let me take a step back and give you a little background on how we got here.  At its most basic level, arbitration is a way to resolve disagreements outside of the federal and state court systems.  Originally, arbitration was primarily used for disputes between businesses; it was rarely used in disagreements between businesses and consumers.  But in the last 20 years or so, companies started including arbitration clauses in their consumer contracts requiring any disputes or disagreements be resolved through private arbitration.  And to make doubly sure that they could escape accountability, many companies specifically blocked group claims even in arbitration, thus forcing consumers to go through the process by themselves in isolation, or forgo it altogether.

Some companies offer their customers the chance to opt out of an arbitration clause.  But very few customers, if any, ever exercise that option, which is unsurprising given that the majority of consumers do not even know that the arbitration clause exists.  Group lawsuits depend on a group.  The few consumers who opt out of arbitration find that very few others are still available to join their lawsuits.  It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court.

Even before the Consumer Bureau was created, Congress had started to take a more active role in dealing specifically with the problems of forced arbitration.  In the last decade, Congress had begun to distinguish between mandatory pre-dispute arbitration, which is typically imposed on consumers in the contractual boilerplate, and arbitration that both parties can freely decide to undertake after a dispute has already arisen between them.  In 2007, Congress passed the Military Lending Act, which prohibited mandatory pre-dispute arbitration clauses in connection with certain loans made to servicemembers.  Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further and banned such clauses from most residential mortgage contracts.

In the Dodd-Frank Act, Congress also put in place a further measure that brings us to where we are today.  In a two-step process, the law empowers the Bureau to address the same concerns that Congress had already highlighted around mandatory pre-dispute arbitration clauses.  First, Congress required the Bureau to conduct a study and issue a report on the use of arbitration clauses in connection with consumer financial products or services.  Once that initial work was completed, Congress gave the Bureau the broad authority to consider whether to issue regulations that it deemed to be in the public interest, for the protection of consumers, and consistent with the results of its study.

***

We published that study and issued our report to Congress earlier this year.  In the months since, even our critics have acknowledged that the multi-year study, which runs to 728 pages and analyzes extensive data, was the most rigorous and comprehensive study of consumer finance arbitration ever undertaken.  In the study, we found that arbitration clauses are pervasive, but the vast majority of consumers do not even know they exist.  We also found that tens of millions of consumers are covered by arbitration clauses in several consumer finance markets.  Large banks, in particular, commonly include these clauses in their standard agreements for credit cards and checking accounts.  We also found that many payday lenders put such clauses in their contracts.  And our study shows that more than three-quarters of the consumers we surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract.

The Bureau’s study specifically concluded that group lawsuits can be an effective way to provide relief to consumers when they are allowed to proceed.  Indeed, by examining five years of data, we found that group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases.  But we also saw that in many instances, as in Kate’s situation, group claims are thwarted by companies that invoke their arbitration clauses to cut off such relief.  For example, in cases where credit card companies with an arbitration clause in their contracts were sued in a class action, the companies invoked the clause to block the lawsuit almost two-thirds of the time.

One point of special interest to us was the claim, frequently made by companies that tout the benefits of arbitration, that these clauses enable them to lower the cost of consumer financial services for consumers.  Our study was able to examine this claim closely by comparing large credit card companies that did and did not have arbitration clauses in their contracts, including some companies that previously had such clauses but had stopped using them in the wake of adverse litigation.  Our analysis did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses.

***

After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers.  The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts.  This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.

One approach we might have taken would be a complete ban on all pre-dispute arbitration agreements for consumer financial products and services.  Our proposal would not do that.  Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court.  This means we are not proposing at this time to limit the use of arbitration clauses as they apply to individual cases.

This approach is consistent with the conclusions reached in our study.  It is also consistent with rules that the Financial Industry Regulatory Authority has applied to broker-dealers for years, with the approval of the Securities and Exchange Commission.  While at one time certain individual arbitration systems were problematic for consumers in terms of procedures and results, we found that companies today generally cannot bring cases against consumers in arbitration.  We also found that companies rarely use their arbitration clauses to block consumers from suing them in individual cases.  In addition, we found that only a small number of consumers bring individual arbitrations.

Although we are not proposing to prohibit the use of pre-dispute arbitration clauses, we will continue to monitor the effects of such clauses on the resolution of individual disputes.  To enable us to do so, our proposals would require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings.  By developing comprehensive data on these matters, over time we will be able to refine our evaluation of how such proceedings may affect consumer protection, if at all.

In order to create more transparency and spur broader thinking by researchers and other interested parties, we are considering publishing this information for all to see, so the public can analyze it as they see fit.  Depending on what the data reveals, down the road these issues could be subject to further consideration by the Bureau and by other policymakers.

***

So the essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.  Doing so would produce three general benefits.

First, consumers would have the opportunity to get their day in court.  This is a core American principle.  Under the U.S. Constitution, each one of us is entitled to seek justice through due process of law.  This right is reinforced in many state constitutions, which recognize the right to an effective remedy to redress injuries we may sustain to our person or our property.  This is an important element of personal liberty, that people should have the ability to protect themselves by acting to vindicate their rights.  Nobody should have to rely on the government first deciding to pursue an enforcement action in order to get their money back and hold others accountable.  But as we have already noted, it is simply not worth it for consumers to undertake the burden and cost of bringing an individual case just to challenge small fees and charges.

As noted U.S. Court of Appeals Judge Richard Posner has convincingly observed, “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”  That is, in fact, a primary reason why procedures allowing for group lawsuits have been widely adopted in virtually all of our federal and state courts in the last century.  By joining together to pursue their claims as a group, all of the affected consumers would be able to seek and, when appropriate, obtain meaningful relief that as a practical matter they could not get on their own.

Second, another important benefit of the proposals we are considering is that they would deter wrongdoing on a broader scale.  One way this is often expressed is by describing group lawsuits as being brought by “private attorneys general” as a means of vindicating public rights and as an aid to other methods of law enforcement.  Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in revenue for financial providers. 

Arbitration clauses that bar group lawsuits protect these ill-gotten gains by enabling companies to avoid being held accountable for their misdeeds.  Thus, companies are likely to take less care to ensure that their conduct complies with the law than they would have taken if they did not have a free pass from group lawsuits.  Indeed, some companies may even feel emboldened that they can safely engage in conduct that could violate consumer protection laws or even their own contracts with customers.  The potential to be held accountable in a group lawsuit changes this dynamic. 

When a group lawsuit leads to a court order conferring relief on tens of thousands of consumers who were victimized by suspect practices, the likely result is to create a safer market for current and future customers of that company, as well as the other companies in the same market.  That is true because a substantial monetary award can lead a company to rethink its practices by reassessing its bottom line.  It is also true because such actions may result in specific measures that force companies to change the way they do business.  And the public spotlight on these cases can influence business practices at other companies that become aware of the need to make similar changes to avoid facing the ire of their customers and the risks of similar lawsuits.

Third, by requiring companies to provide the Bureau with arbitration filings and written awards, which might be made public, the proposals we are considering would bring the arbitration of individual disputes into the sunlight of public scrutiny.  This would provide a safeguard against arbitration proceedings that are unfair or otherwise harmful to consumers.  Furthermore, both the Bureau and the public would be able to monitor and assess the pros and cons of how arbitration clauses affect resolutions for individuals who do not pursue group claims.  This will improve our understanding and enable policymaking that is better informed and more precise.  In the end, that will be better for consumers, for responsible businesses, and for the economy as a whole.

***

One way to think about the effect of enforced pre-dispute arbitration clauses is to recall what Sherlock Holmes described as “the curious incident of the dog in the night-time.”  In the famous detective story, everyone except Holmes misses the fact that the dog did nothing during the night, including not barking at all, which yields the important clue that the intruder likely was recognized.  What the story illustrates is that it is often hard to grasp the significance of something that does not happen and thus can easily go unnoticed.

The same point can also be applied to arbitration.  What we learned in the course of our study is that very few consumers of financial products and services are seeking relief individually, either through the arbitration process or in court.  Moreover, there are also an unknown number of cases that are never filed because of the mere presence of an arbitration clause.  And millions of other consumers who may not even realize that their rights are being violated might have obtained relief if group lawsuits were permissible.  Like the dog that did not bark in the night, the silent fact of all this missing relief for consumers can be hard to notice, but it is nevertheless a vital piece of the story.

The central idea of the proposals we are considering is to restore to consumers the rights that most do not even know had been taken away from them.  Companies should not be able to place themselves above the law and evade public accountability by inserting the magic word “arbitration” in a document and dictating the favorable consequences.  Consumers should be able to join together to assert and vindicate their established legal rights.  Under the approach we are considering, companies would not be able to tip the scales in their favor by writing their own free pass to the detriment of consumers.  Everyone benefits from a market where companies are held accountable for their actions.  Thank you.

### 

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov. 

Lawsuit stalls after engine failure: Porsche purchaser must arbitrate his warranty claim, Houston Court of Appeals rules

AN Luxury Imports Ltd dba BMW of Dallas, Inc. v Southall, 

No. 01-15-00194-CV (Tex.App.- Houston [1st Dist.]  Oct. 1, 2015)

Opinion issued October 1, 2015

In The

Court of Appeals

For The

First District of Texas

————————————

NO. 01-15-00194-CV

———————————

AN LUXURY IMPORTS LTD., D/B/A BMW OF DALLAS, INC., AN

LUXURY IMPORTS GP, LLC, AND UNITED STATES WARRANTY

CORP., Appellants

V.

D. SCOTT SOUTHALL, Appellee

On Appeal from the 295th District Court

Harris County, Texas

Trial Court Case No. 2014-33551

MEMORANDUM OPINION

In this appeal we determine whether the trial court erred in denying a car
dealer’s motion to compel arbitration in this suit for breach of warranty against the
dealer and its warranty administrator. AN Luxury Imports, Ltd. d/b/a BMW of
2
Dallas (BMW Dallas), AN Luxury Imports GP, LLC, and United States Warranty
Corp. (U.S. Warranty) (collectively, “the sellers”) appeal the denial of their motion
to compel arbitration against D. Scott Southall, BMW Dallas’s customer. The
sellers contend that the trial court erred in denying the motion because the parties’
dispute is subject to an enforceable arbitration agreement. We conclude that the
trial court erred by denying the motion to compel arbitration and therefore reverse.

Background

In December 2013, Southall purchased a Porsche Cayman from BMW
Dallas. In connection with the purchase, Southall and BMW Dallas executed a
retail purchase agreement, an arbitration agreement, and a used vehicle limited
mechanical warranty. The parties signed these agreements contemporaneously
with each other. The arbitration agreement provides:
[Southall] and [BMW Dallas] agree that arbitration will be the sole method
of resolving any claim, dispute, or controversy . . . that either Party has
arising from Customer[]/Dealership Dealings. Such [c]laims include . . . (2)
[c]laims relating to any . . . warranties . . . and (5) [c]laims arising out of or
relating to . . . this [a]greement and/or any and all documents executed,
presented or negotiated during Customer[]/Dealership Dealings, or any
resulting transaction, service, or relationship, including that with the
Dealership, or any relationship with third parties who do not sign this
[a]greement that arises out of the Customer[]/Dealership Dealings.
The purchase agreement incorporates the arbitration agreement by reference:
“If [the purchaser] ha[s] executed an Arbitration Agreement in conjunction with
this Agreement such Arbitration Agreement shall be incorporated herein by
3
reference and made a part of this Agreement.” The arbitration agreement provides
that if there is any conflict between the purchase agreement and the arbitration
agreement, the purchase agreement governs.
The purchase agreement also contains a forum selection clause. It provides
that the “sole and exclusive venue for any dispute or litigation arising under or
concerning this [purchase agreement] shall be in the courts located in and for the
county in which [BMW Dallas] is located, and the parties irrevocably consent to
the jurisdiction of said court. Any and all arbitration proceedings shall also take
place in the county where the dealer is located, unless agreed otherwise by the
parties.”
BMW Dallas issued the warranty and “appointed United States Warranty
Corporation as the authorized Administrator for th[e] . . . Warranty.” The warranty
does not refer to the arbitration agreement or the purchase agreement.
The Porsche engine failed within two months of the sale. Southall filed a
claim with U.S. Warranty for the damage. U.S. Warranty denied the claim,
determining that Southall had caused the damage by driving the Porsche during
“racing or other competition.” Southall’s mechanic disagrees; he concluded that
the Porsche already had exceeded its maximum allowable RPM before Southall
bought it.
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Southall sued for breach of contract, breach of warranty, negligence, unfair
settlement practices under the Texas Insurance Code, fraud by nondisclosure,
negligent misrepresentation, violations of the Texas Deceptive Trade Practices Act,
and the federal Magnuson-Moss Warranty Act. The sellers moved to compel
arbitration; the trial court denied the motion.

Discussion

Standard of Review

The arbitration agreement states that the Federal Arbitration Act governs its
enforcement. This appeal thus arises under section 51.016 of the Texas Civil
Practice and Remedies Code, which permits an interlocutory appeal from an order
denying a motion to compel arbitration under the Federal Arbitration Act (FAA).
See TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West 2015). We review an
order denying a motion to compel arbitration for an abuse of discretion, deferring
to the trial court’s factual determinations if they are supported by the evidence and
reviewing questions of law de novo. Cleveland Constr., Inc. v. Levco Constr., Inc.,
359 S.W.3d 843, 851–52 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d).
Applicable Law
A party moving to compel arbitration must establish (1) the existence of a
valid, enforceable arbitration agreement and (2) that the claims asserted fall within
the scope of that agreement. In re Provine, 312 S.W.3d 824, 828–29 (Tex. App.—
5
Houston [1st Dist.] 2009, no pet). “Once the trial court concludes that the
arbitration agreement encompasses the claims . . . the trial court has no discretion
but to compel arbitration and stay its own proceedings.” In re FirstMerit Bank,
N.A., 52 S.W.3d 749, 753–54 (Tex. 2001).
Once a party seeking arbitration carries its initial burden to prove the
existence of a valid agreement to arbitrate, then a strong presumption favoring
arbitration arises. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737–38
(Tex. 2005); J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003);
Speedemissions, Inc. v. Bear Gate, L.P., 404 S.W.3d 34, 41 (Tex. App.—Houston
[1st Dist.] 2013, no pet.). “[C]ourts should resolve any doubts as to the
agreement’s scope, waiver, and other issues unrelated to its validity in favor of
arbitration.” Ellis v. Schlimmer, 337 S.W.3d 860, 862 (Tex. 2011). An order to
arbitrate should not be denied unless it can be said with positive assurance that the
arbitration clause does not cover the dispute. United Steelworkers v. Warrior &
Gulf Navigation Co., 363 U.S. 574, 582–83, 80 S. Ct. 1347, 1353 (1960); HouScape,
Inc. v. Lloyd, 945 S.W.2d 202, 205 (Tex. App.—Houston [1st Dist.] 1997,
orig. proceeding) (per curiam).
To determine whether the parties formed an agreement to arbitrate, we apply
ordinary state-law principles governing contracts. In re Palm Harbor Homes, Inc.,
195 S.W.3d 672, 676 (Tex. 2006) (orig. proceeding); J.M. Davidson, Inc., 128
6
S.W.3d at 227–28; accord JP Morgan Chase & Co. v. Conegie, 492 F.3d 596, 598
(5th Cir. 2007). The elements of a valid contract are: (1) an offer, (2) an
acceptance, (3) a meeting of the minds, (4) each party’s consent to the terms, and
(5) execution and delivery of the contract with the intent that it be mutual and
binding. Prime Prods., Inc. v. S.S.I. Plastics, Inc., 97 S.W.3d 631, 636 (Tex.
App.—Houston [1st Dist.] 2002, pet. denied). Our primary concern in construing a
written contract is to ascertain the true intent of the parties as expressed in the
instrument. Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342,
345 (Tex. 2006). Contract terms will be given their plain, ordinary, and generally
accepted meanings, unless the contract indicates a technical or different sense.
Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005).
Instruments pertaining to the same transaction may be read together to
ascertain the parties’ intent. Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22
S.W.3d 831, 840 (Tex. 2000). In appropriate instances, courts may construe all the
documents as if they were part of a single, unified instrument. Id. at 840; Courage
Co., L.L.C. v. Chemshare Corp., 93 S.W.3d 323, 333 (Tex. App.—Houston [14th
Dist.] 2002, no pet.).

Analysis

The sellers contend that they have produced a valid arbitration agreement
and that Southall’s claims fall within its scope. Southall responds that the
7
arbitration agreement does not require arbitration because it conflicts with
provisions of the purchase agreement, which controls in the event of a conflict.
Southall further responds that the warranty does not contain an arbitration
provision and thus his warranty claim is not subject to arbitration.
I. Validity of the Arbitration Agreement
The arbitration agreement provides that it applies to claims arising from a
purchase of a vehicle from BMW Dallas. Southall and BMW Dallas signed the
arbitration and purchase agreements at the same time, and the agreements reference
one another. Southall and BMW Dallas’s contemporaneous execution of the
agreements is evidence of their intent to read the agreements together. See Palm
Harbor Homes, 195 S.W.3d at 676; Prime Prods., 97 S.W.3d at 636. Accordingly,
we read them as a “single, unified instrument.” See Fort Worth Indep. Sch. Dist.,
22 S.W.3d at 840. Because the purchase and arbitration agreements reference one
another, and the purchase agreement expressly incorporates the arbitration
agreement, the sellers have met their burden to demonstrate a valid, enforceable
arbitration agreement in connection with Southall’s purchase. See Palm Harbor
Homes, 195 S.W.3d at 676; Fort Worth Indep. Sch. Dist., 22 S.W.3d at 840; In re
Provine, 312 S.W.3d at 828–29; Prime Prods., 97 S.W.3d at 636.
Southall relies on the forum selection clause to contend that the purchase
agreement contravenes the arbitration agreement. That clause places venue in the
8
county in which BMW Dallas is located should litigation arise. But the clause
further provides that “[a]ny and all arbitration proceedings shall also take place in
the county where [BMW Dallas] is located.” The purchase agreement expressly
contemplates arbitration as a means of dispute resolution; the venue provision does
not conflict with the arbitration agreement.
We hold that the arbitration agreement is valid and enforceable.
II. Scope of the Arbitration Agreement
The sellers next contend that the trial court should have compelled
arbitration because Southall’s claims fall within the scope of the arbitration
agreement. In Speedemissions, Inc. v. Bear Gate, L.P., this court examined a
securities purchase agreement, which contained an arbitration agreement, and lease
agreements, which did not. We held that the trial court properly denied a motion to
compel arbitration in a dispute about the lease agreement. 404 S.W.3d 34, 37, 42,
44 (Tex. App.—Houston [1st Dist.] 2013, no pet.). This court reasoned that
different parties executed the two agreements, and each agreement had a “distinct
and separate purpose.” Id. at 43. There were no provisions in the lease agreements
relating their performance to the securities purchase agreement, and neither
agreement referenced the other. Id. at 44, 46.
In contrast, in Enterprise Field Services, LLC v. TOC-Rocky Mountain, Inc.,
we held that a party’s counterclaims regarding an ancillary agreement fell within
9
an arbitration provision. 405 S.W.3d 767, 773–74 (Tex. App.—Houston [1st Dist.]
2013, pet. denied). In one agreement, the parties agreed to arbitrate “dispute[s]
related to [] interpretation or performance.” Id. at 773. Although the
counterclaims were based on a different agreement, they required interpretation of
the agreement containing the arbitration clause. Id. Because the two agreements
were intertwined, we held that the trial court erred in concluding that the claims did
not fall within the scope of the arbitration agreement. Id. at 774.
This case is more analogous to Enterprise Field Services. BMW Dallas
issued the warranty and appointed U.S. Warranty as the authorized administrator.
The warranty, purchase agreement, and arbitration agreement were executed by the
same parties, contemporaneously and as part of the same transaction. The
arbitration agreement applies to “any claim, dispute, or controversy” that arises out
of the “Customer[]/Dealership Dealings.” Customer/dealership dealings include
the process of “purchasing or leasing a vehicle[].” “Claims” is broadly defined to
include claims relating to warranties, and those relating to “any and all documents
executed, presented or negotiated during Customer[]/Dealership Dealings, or any
resulting transaction, service, or relationship, including that with the Dealership, or
any relationship with third parties who do not sign this Agreement that arises out
of the Customer[]/Dealership Dealings.” Because the arbitration agreement
applies to claims arising out of the purchase, and the agreement expressly covers
10
all other contemporaneously signed agreements and warranty claims, we hold that
Southall’s claims against the sellers fall within its scope. See Enterprise Field
Servs., 405 S.W.3d at 774. Although the warranty does not contain a separate
arbitration provision, its execution in conjunction with the other agreements
connotes a “single, unified instrument.” See Fort Worth Indep. Sch. Dist., 22
S.W.3d at 840. Accordingly, we hold that Southall’s claims arising from the
purchase of the vehicle and the warranty, including the transaction with U.S.
Warranty, fall within the scope of the arbitration agreement.
Southall further responds that the arbitration agreement does not govern his
claims under the Magnuson-Moss Warranty Act. Under the Act, all warranties
must “fully and conspicuously disclose in simple and readily understood language
the terms and conditions of such warranty,” including “[a] brief, general
description of the legal remedies available to the consumer.” 15 U.S.C.
§ 2302(a)(9) (2013). The warranty contains an integration clause stating that the
warranty is a “complete statement of coverage and rights” and does not incorporate
the arbitration agreement by reference. Southall cites Cunningham v. Fleetwood
Homes of Georgia as support for his contention that the warranty itself must
contain the arbitration provision. Cunningham v. Fleetwood Homes of Ga., 253
F.3d 611 (11th Cir. 2001).
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The Act allows informal dispute settlement procedures only if they are
clearly expressed in the warranty. See 15 U.S.C. § 2302(a)(8). The Eleventh
Circuit held in Cunningham that “informal dispute settlement procedures” included
binding arbitration. See 253 F.3d at 623 (citing 15 U.S.C. § 2302(a)(8)). In that
case, the purchasers of a mobile home executed a stand-alone arbitration
agreement as part of the sale and received a separate manufacturer’s warranty. 253
F.3d at 613. The court held that the Act required the manufacturer to disclose
informal dispute settlement procedures, including binding arbitration, in a single
document. Id. at 623–24.
In a subsequent case, however, the Eleventh Circuit retreated from
Cunningham, observing that the Cunningham court improperly had conflated
binding arbitration with informal dispute settlement procedures, and neither the
statutory language nor its legislative history supported such an interpretation.
Davis v. S. Energy Homes, Inc., 305 F.3d 1268, 1276 (11th Cir. 2002). The Fifth
Circuit’s opinion in Walton v. Rose Mobile Homes LLC supports this latter
conclusion. 298 F.3d 470 (5th Cir. 2002). Like the Eleventh Circuit in Davis, the
Fifth Circuit in Walton concluded that the two procedures are distinct, observing
that informal dispute settlement procedures happen before suit is filed while
binding arbitration happens as a substitute for filing suit. Walton, 298 F.3d 470,
475–76 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.
12
614, 628 (1985)). Following Walton and Davis, we similarly hold that nothing in
the Act precludes enforcement of a stand-alone arbitration agreement signed in
connection with an express warranty.

Conclusion

Because an enforceable arbitration agreement governs the claims against the
sellers, we reverse the order of the trial court and remand the case for further
proceedings consistent with this opinion.

Jane Bland
Justice

Panel consists of Chief Justice Radack and Justices Bland and Huddle.