With the coming of the covid-19 pandemic, the Supreme Court’s work during the spring 2020 term was profoundly affected. The chief justice entered an administrative order on March, 2020 declaring a judicial emergency in all 55 of West Virginia’s counties. Courthouse doors were closed. All in-person judicial proceedings were suspended. Filing deadlines and statutes of limitations were stayed.
Oral arguments that were scheduled for March, 2020 were cancelled. In April, however, the Supreme Court began hearing arguments via remote technology in time-sensitive cases, including criminal cases and abuse and neglect cases. By embracing technology, the Court was able to hear most—but certainly not all—of the cases that it had docketed. Some of the cases that were not argued were submitted on the briefs. Others, however, will have to be rescheduled in the fall term.
The long and the short of it is that there were fewer cases decided this term than usual. But there were still plenty of opinions that are important for attorneys who are engaged in a litigation practice. That is especially true when it comes to arbitration. Recently, arbitration has become a hot button issue. With the “federalization” of arbitration law, defeating an arbitration clause in a contract has become more difficult. But it is not an insurmountable task. The cases decided during the spring 2020 term help us to navigate the law and equip us to effectively deal with arbitration issues.
Let’s take a look together at three arbitration cases.
The first case is TD Auto Finance, LLC v. Reynolds. Reynolds, who was shopping for a truck, signed a form with the dealership authorizing a credit check. The credit form contained arbitration language. Thereafter, he signed a purchase agreement that did not contain any language requiring arbitration. The purchase agreement also contained a merger clause stating “this contract contains the entire agreement between you and us.” The dealership then assigned the agreement to TD Auto.
Eventually, Reynolds fell behind in the truck payments. TD Auto exercised its repossession rights and then began harassing Reynolds with letters and telephone calls. Reynolds sued, alleging that TD Auto was violating West Virginia’s consumer laws. TD Auto asked the trial court to order the parties to arbitration.
The issue boiled down to this: Should the two contracts be read together or separately? The general rule in West Virginia was set down over 40 years ago:
“Separate written instruments will be construed together and considered to constitute one transaction where the parties and the subject matter are the same, and where there is clearly a relationship between the documents.”
In a win for the consumer, the Supreme Court held that the arbitration provisions in the credit application “did not survive the merger clause of the [purchase agreement], thereby nullifying [Reynolds] obligation to arbitrate their claims against [TD Auto].” In a concurrence, Justice Hutchison pointed out this wasn’t really an arbitration case, but “a dull, run-of-the-mill, state-law contract interpretation case.” He then gave us a helpful summary of what incorporation by reference is—and what it isn’t: “Incorporation by reference pulls existing material into the new, incorporating contract; it does not push material terms into nonexistent, as-yet-unassented-to future contracts.”
Unfortunately, the consumer didn’t prevail in Bayles v. Evans. Here are the facts. Before his death, W. Nelson Bayles rolled over the proceeds of a 401k into an IRA. His wife alleges that Bayles and an Ameriprise employee fraudulently coerced her to consent to the rollover. At some point thereafter, Bayles changed the beneficiary—removing his wife and substituting his daughter. The wife sued the daughter and Ameriprise, both of whom cited arbitration language in the investment agreements.
The question in Bayles was whether the wife, who hadn’t signed the agreements, was nevertheless bound by the arbitration language. The Court held that the doctrine of equitable estoppel applied: “[T]he doctrine of equitable estoppel allows a court to prevent a nonsignatory from embracing a contract, but then turning his, her, or its back on the portions of the contract (such as an arbitration clause) that the nonsignatory finds distasteful.” When a party has obtained or is seeking to obtain a “direct benefit” under a contract, equitable estoppel will apply. Here, the wife was clearly seeking to obtain assets deposited into her husband’s accounts and “to enforce her understanding of the contract.” Therefore, equitable estoppel prevented the wife from “cherry-picking the terms beneficial to her while disavowing the terms she would prefer not to be governed by.”
Wins for consumers are hard to come by in arbitration cases. Reynolds reminds us that the best and most effective way of attacking an arbitration agreement is by arguing a lack of assent—i.e., that the consumer never assented to arbitration as a part of the agreement. But Bayles is a reminder too. Even though a consumer may not have assented, there are still legal doctrines that can come into play to make arbitration language binding.
Finally, let’s take a look at Stonerise Healthcare v. Oats. Oats was a nursing home death case. The patient’s admission agreement contained an arbitration clause that was chock full of onerous provisions, including “loser pays” language empowering the arbitrator to award attorney fees against the losing party. Downplaying the oppressiveness of the “loser pays” language, the Supreme Court likened it to the power of trial courts to shift fees in certain kinds of cases. However, Justice Hutchison pointed out that under the clause’s language “the arbitrator may award fees and costs simply because one party loses the case, even if the losing party has acted in the best of faith.” The three justices in the majority enforced the agreement in its entirety. Justice Hutchison found the “loser pays” provision to be unconscionable, but would have enforced the remainder of the agreement. Justice Workman dissented, believing that arbitration agreements are unenforceable against wrongful death beneficiaries because they have not signed the agreements or benefitted from them.
Oats is a reminder that unconscionability is available as a tool to attack arbitration agreements. However, success can be difficult. Here, the “loser pays” provision was meant to make arbitration so risky that most, if not all, patients would opt to forego their claims. Enforcing that provision was a tragedy for consumers and a win for big business. Hopefully the Supreme Court will see the wisdom of Justice Hutchison’s approach the next time it takes up an unconscionability issue.