Pennsylvania Court Invalidates Arbitration Provisions

September 2, 2015

Recently, the court of common pleas for Montgomery County, Pennsylvania, issued an opinion in the case of Coyle v. 350 Haws Lane Operations, LLC, which if affirmed on appeal, may vitiate common arbitration agreements. Although this case arose in the context of a consumer action for personal injury as well as breach of contract against a nursing home, some of the reasons for invalidating the arbitration provisions may be applicable to other contracts.

This article will not discuss the more prosaic aspects of the case, although the background will be related. The plaintiff was a lawyer and the brother and attorney-in-fact for his sister, who was being admitted to the an assisted living facility. The defendant was a subsidiary of a corporation that owned or managed a chain of such facilities. The complaint alleged that the sister/patient was abused while in the home, and the defendant sought to have the case arbitrated pursuant to an agreement signed by the plaintiff pursuant to his power of attorney. Arbitration under the agreement would have been "common law" arbitration governed by 42 Pa. C.S.A. §§ 7341, et seq., rather than pursuant to Pennsylvania's version of the Uniform Arbitration Act, 42 Pa. C.S.A. §§ 7301, et seq.

Arbitrability. The first issue that is troubling is that the court held the agreement invalid because it provided that the arbitrator:

". . . shall resolve all 'gateway' disputes regarding the enforceability, validity and/or interpretation of this Agreement, as well as the parties' underlying dispute, as it is the parties' intent to completely avoid involving the court system",

citing cases that hold that under Pennsylvania law the issues of whether an agreement to arbitrate even exists, and if so, whether the dispute falls within its scope, are for the courts to resolve. Thus, the court is stating that the parties are powerless to agree to vest the arbitrator with jurisdiction to decide these issues.

This appears to be contrary to federal law under the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. Although federal law favors resolution of these issues by the courts, the parties may, by unmistakable language provide otherwise. See, Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S.Ct. 2772 (2010); cf. Opalinski v. Robert Half International, Inc., 761 F.3d 326 (3d Cir. 2014), cert. denied, U.S. , 135 S.Ct. 1530 (2015).

Referral to Provider of Arbitration Provider. Arbitration agreements very often delegate the matter to be arbitrated to a particular organization, such as the American Arbitration Association, or the Federal Mediation and Conciliation Service (if a labor contract), and further provide that the procedural rules of that organization governing the particular nature of the dispute will apply. In the case at bar, the arbitration agreement provided:

"Within 15 days of service of the Demand for Arbitration, the parties shall agree upon an Arbitration Organization to oversee the arbitration process. If the parties are unable to agree, then the JAMS Endispute rules will apply."

The court had multiple problems with this provision. First, it complained that JAMS was not properly identified. Concededly, it would have been better for the agreement to have used the long form of the name of the company, namely JAMS, Inc. However, even if it had been so specific, the court would have found the referral to JAMS unenforceable on its face, as it was the "default" arbitration overseer if the defendant did not otherwise agree. The court did not cite authority for this proposition. Cf., 42 Pa. C.S.A. § 7305 ("If the agreement to arbitrate prescribes a method of appointment of arbitrators, the prescribed method shall be chosen."); Povey v. Midvale Co., 175 Pa. Super. 395, 105 A.2d 172, cert. denied, 348 U.S. 875, 75 S.Ct 112 (1954) (agreement that names four persons from whom the arbitrator will be chosen is enforceable).

Incorporation of Rules. The court also invalidated the arbitration agreement because it incorporated the JAMS procedural rules. For this proposition, it relied on Bair v. Manor Care of Elizabethtown, PA, LLC, 108 A.3d 94 (Pa. Super. 2015). In Bair, the agreement incorporated rules that were described in a brochure that had been attached to the agreement, but in fact had not been so attached. Therefore, the Superior Court invalidated the Bair agreement as lacking a meeting of the minds. Like Bair, in this case, the rules had not been attached to the agreement containing the arbitration clause, although in a footnote, the agreement stated they were available on request. Accordingly, the court found that, as in Bair, there was no meeting of the minds as to the rules to be followed.

The court also objected to the rules themselves, also without citation. First, because the rules were thirty pages long, the court held it unconscionable to incorporate them without first providing them for review. Other objections to the JAMS rules were that the rules did not mention the $400.00 per day Case Management Fee, that the rules failed to state the arbitrators' fees, that the rules provided that the arbitrator was not bound by the rules of evidence (but, see, Ulansey v. Juniata Park Medical Centers, Inc. 406 Pa. 389, 178 A.2d 547 (1962) (Arbitrators not bound by rules of evidence)), that no record would be kept without either the parties' agreement or the arbitrator's direction (but, see, Cerankowski v. State Farm Mutual Automobile Insurance Co., 2001 Pa. Super. 269, 783 A.2d 343 (2001), appeal denied, 568 Pa. 692, 796 A.2d 977 (2002) (stenographic record of arbitration proceedings not required)), and there were various limitations on discovery (but, see, 42 Pa. C.S.A. § 7309 (arbitrators "may permit a deposition to be taken of a witness who cannot be served with a subpoena or who is unable to attend the hearing"); Harleysville Mutual Casualty Company v. Adair, 421 Pa. 141, 218 A.2d 791 (1966) (discovery is not essential of due process to valid arbitration proceeding).

Limitation of Damages. The court found several reasons to refuse enforcement to the provision limiting damages "including compensatory and punitive damages, fees and other costs" to the "lesser of . . . three (3) times the amount of the prevailing party's compensatory damages . . . ." This section of the agreement left the question of enforceability of the limitation to the arbitrator. This latter section was invalidated on the same grounds as the issue of arbitrability, generally. The first objection to the substance of the limitation was that the effect of the language was to limit the punitive damages to only a multiple of the compensatory damages, reduced by any fees or costs that might be awarded. Second, the limitation of punitive damages in connection with personal injuries was considered unconscionable and unenforceable, based on Carll v. Terminix Int'l Co., L.P., 793 A.2d 921 (Pa. Super. 2002) (complete prohibition of punitive damages for person injuries unenforceable).

Observations and Conclusions.

If this case is allowed to stand, it may be very difficult if not impossible to draft an arbitration agreement that will be enforceable, at least in a consumer context. Nevertheless, we recommend reviewing and considering whether you should make any of the following changes.

First, specify that arbitration will be under the Uniform Arbitration Act, and not common law arbitration. Although the common law arbitration statute incorporates certain provision of the Uniform Act, the specificity of the Uniform Act should override many if the objections of the Coyle court.

Second, if you are requiring arbitration under the auspices of an arbitration or alternate dispute provider, fully identify both the organization and the address of the office where the proceeding will be held. Because both the administrative fees and the arbitrators' fees of organizations such as JAMS, Inc., and the American Arbitration Association can be prohibitively high for consumers, consider referral to an alternate dispute resolution organization sponsored by a county or city bar association. As an alternative, you could provide that if the parties cannot agree on an arbitrator, either may ask the court to appoint one.

Third, incorporate a representation that the other party or its counsel is familiar with the rules of the arbitration provider, and knowingly agrees to be subject to those rules. You might also include a representation that the purpose of resorting to arbitration is to avoid the delays and high legal costs of court proceedings, and therefore the parties voluntarily agree to waive (or limit) discovery.

Finally, we recommend deleting any limitation on tort damage awards. We recognize that any arbitration that might be provided for, even in a consumer context, is likely to involve a commercial rather that a personal injury dispute, that claims of fraud or deception would be barred by the gist of the action or economic loss doctrines, and that punitive damages are not awarded in contract disputes. Therefore, there is little to be gained by specifically banning punitives.

We would be happy to discuss these matters further with you. Please do not hesitate to call or e-mail.