Federal Arbitration Act

The Supreme Court and the Third Circuit decided three cases in the last week relating to the interpretation and enforceability of arbitration agreements. We discuss them below.

Third Circuit Compels Arbitration of an E-Signed Enrollment Agreement

The Third Circuit compelled arbitration of an agreement signed electronically by a student taking online courses. In Dicent v. Kaplan University, Maria Dicent, who represented herself in the case, filed a complaint against Kaplan University for various causes of action. Kaplan moved to compel arbitration on the basis that Dicent electronically signed a packet containing both an enrollment agreement and an arbitration agreement. Dicent claimed that she was not aware of the arbitration agreement and that Kaplan “tricked” her by including it within the enrollment packet.

According to the lower court, Kaplan supported its motion to compel with an affidavit explaining its e-signature verification process. To enroll in courses, students must log into an enrollment portal website. After clicking the “Electronically Sign” button, students enter personal identifying information on a verification page. An e-signature verification company compares the information with that in a confidential database. Upon positive verification of the student’s identity, the student and Kaplan receive a confirmation that the e-signature was successful. Kaplan’s records showed that Dicent’s enrollment packet, including the arbitration agreement, was accepted.

The Third Circuit explained that the first step in deciding whether to compel arbitration is to ask whether the parties have a valid agreement to arbitrate. In this case, the issue was whether Dicent assented to the agreement. Assent, the court explained, turns on ordinary state-law contract principles. The court observed that Pennsylvania, which the parties agreed governed the contract, recognizes e-signatures as a valid means to register legal assent.

The court held that there was no genuine issue of material fact as to whether Dicent assented to the arbitration agreement. Kaplan had presented evidence of her e-signature and Dicent conceded that she e-signed the enrollment packet. It concluded that the “most reasonable inference we can draw from the evidence presented is that Dicent simply did not read or review the Enrollment Packet PDF closely before she e-signed it, which will not save her from her obligation to arbitrate.”

A link to the opinion is here.

Justices Reject Judicially-Created Exception Limiting Enforcement of Arbitrability

 In Schein, Inc. v. Archer & White Sales, Inc., Justice Kavanaugh, writing for a unanimous Court, rejected the judicially-created “wholly groundless” exception to arbitrability.

Archer & White filed a complaint against Henry Schein, Inc. for various causes of action. Schein moved to compel arbitration on the basis that the parties’ contract required arbitration of “[a]ny dispute arising under or related to this Agreement.” Archer & White opposed the motion, arguing that it was “wholly groundless.” It pointed to the arbitration clause’s exception for “actions seeking injunctive relief” and argued that Schein sought injunctive relief in addition to damages.

The Court considered this question: does a court or an arbitrator decide whether a dispute falls within an exception to the parties’ arbitration clause? The arbitrator decides, the Court held; a court has no power to decide the arbitrability issue if the parties’ contract delegates that issue to an arbitrator. The Court concluded that the “wholly groundless” exception, adopted by some lower courts, was inconsistent with the Federal Arbitration Act’s text, which contains no such exception. It also contravened earlier cases, the Court said, that held courts cannot screen from arbitration cases that appear frivolous on the merits and that arbitrators may decide “gateway” questions of arbitrability.

A link to the opinion is here.

 Justices Uphold Statutory Exemption for Independent Contractor

In New Prime Inc. v. Oliveira, a unanimous opinion penned by Justice Gorsuch, the Supreme Court affirmed the First Circuit’s judgment that it lacked authority under the Federal Arbitration Act to enforce an arbitration agreement between an interstate trucking company and one of its drivers. The driver, purportedly an independent contractor, had argued that an exception to the Act for “contracts of employment” for transportation workers removed his agreement from the Act’s coverage.

The Supreme Court first considered whether a court or an arbitrator should decide whether the statutory exception applies. The court should decide, it held. The Court reasoned that the provisions of the Act empowering courts to stay litigation and compel obligation apply only if the Act applies, which requires an initial determination of whether the contract falls within the Act’s “contracts of employment” exception.

 The Court then turned to the term “contracts of employment.” Looking to its meaning in 1925, the year the Act was adopted, the Court concluded the term “meant nothing more than an agreement to perform work.” Dictionaries of that era, the Court said, did not distinguish between employees and independent contractors.

Although New Prime did not distinguish Schein, discussed above and decided only a week earlier, the key difference appears to be that Schein involved interpreting a contract whereas New Prime involved interpreting the statute, the source of the court’s authority to compel arbitration in the first place.

A link to the opinion is here.