New York Federal Court Enforces Arbitration Clause Containing Class Action Waiver

On August 3, 2012, Judge Paul Engelmayer of the United States District Court for the Southern District of New York upheld a consumer arbitration clause containing a class action waiver. The decision is significant because it addresses and clarifies various issues concerning consumer arbitration agreements that have been hotly debated over the last few years.

These issues include: (1) the context in which a consumer assents to arbitration; (2) the extent to which nonsignatories are covered by an arbitration agreement; (3) the situation in which an unavailable designated arbitral forum can or cannot invalidate binding arbitration; (4) the circumstances for assessing substantive and procedural unconscionability of a class action waiver; (5) the inapplicability of a vindication of federal statutory rights analysis to state law claims brought in diversity actions; and (6) the type of language effectively showing a clear and unmistakable delegation of enforceability issues to the arbitrator.

Click here for the opinion in Crewe, et al. v. Rich Dad Education, LLC, et al., 11-CIV-8301 (PAE).

Crowell & Moring LLP successfully represented defendants Rich Dad Education, LLC, Tigrent Inc., Tigrent Learning Inc., and Tigrent Brands Inc., as well as two individuals, in this action. 

A summary of the Court's rulings and reasoning follows below:

This purported consumer class action was brought by two plaintiffs against Tigrent Inc. and related entities that provide financial education as part of the Rich Dad training programs. Plaintiffs alleged that the Rich Dad programs they attended did not provide the promised financial education but were instead designed to try and "up-sell" students to register for more expensive programming. The complaint asserted state law claims for breach of contract, fraud, and deceptive practices under Florida law. The Court dismissed with prejudice as to one plaintiff (Crewe) on account of an enforceable binding arbitration clause and without prejudice as to the other plaintiff (Maurice) due to a mandatory forum selection clause requiring claims to be brought in Florida.

Much of the opinion's focus is on plaintiff Crewe's challenges to the arbitration provision in his student agreement with defendant Rich Dad Education, LLC ("RDE") that included a class action waiver. The Court rejected all of Crewe's challenges as follows:

1.         Assent to the Arbitration Agreement

Crewe asserted that he never assented to the arbitration clause on account of the clause being contained in a separate sheet of "Terms & Conditions." The Court rejected this argument because Crewe had signed the contract and initialed next to a prominent notice informing him that the agreement was legally binding and contained a dispute resolution clause. This document, in fact, explicitly stated that Crewe had "received the Terms and Conditions of this agreement." The contract also gave Crewe an express right to cancel the agreement without penalty during the next three business days. Crewe did not exercise this right, and thus remained bound to the terms of the agreement, including the arbitration clause. As a matter of law, the Court held that Crewe's argument failed in any event because "a customer does not have the right to avoid a contract on the ground that he did not read it." Similarly, Crewe could not at one and the same time allege breach of contract and lack of assent. As the Court stated: "It is axiomatic that a plaintiff cannot claim lack of mutual assent when he alleges breach of contract."

2.         Arbitration Clause Covered Nonsignatories to the Student Agreement

Crewe argued that, to the extent the arbitration clause was enforceable, it did not bind defendant Tigrent Inc. and other defendants that were not signatories to the RDE student agreement. The Court disagreed, noting that the arbitration clause provided for arbitration of all disputes between Crewe and RDE, its "parent entity, subsidiaries, affiliates, officers, directors, shareholders, agents, licensees, successors, and assigns." The complaint itself alleged that RDE and other corporate defendants were affiliates and agents of each other. The Court also found that, for purposes of the arbitration agreement, the individual defendants functioned as officers, shareholders, or agents, and thus were encompassed by the broad terms of the arbitration clause. Crewe would have to arbitrate his claims against any of these nonsignatory defendants. Alternatively, the Court determined that principles of equitable estoppel bound the other defendants to arbitration because the complaint "contained pervasive allegations of interdependent and coordinated misconduct between the nonsignatories and signatory RDE."

3.         The Designated Unavailable Forum Was Not Integral to the Arbitration Clause

The Court rejected Crewe's attempt to invalidate the arbitration on grounds that the designated arbitral forum, the National Arbitration Forum ("NAF"), no longer administers consumer arbitrations. The arbitration clause, however, contained alternate forum language providing that "[the parties] will agree on another binding arbitration forum if NAF ceases operations." The Court found that this showed that NAF was clearly not "integral" to the parties' agreement to arbitrate, and so the arbitration clause remained enforceable despite NAF's unavailability. The Court observed that "[i]t is difficult to imagine language that could more clearly indicate the parties' willingness and intention to arbitrate in a forum other than the designated forum." Rejecting Crewe's argument that NAF had not "literally 'ceased operations'" and that the Court had no authority to select an alternative forum, the Court further found that, under the Federal Arbitration Act Section 5 or under Florida or New York law, "there is no . . . barrier to the appointment of an alternative forum," where "the parties' agreement reflects a broader intention to arbitrate even if the designated forum . . . prove[s] unavailable."

4.         Vindication of Federal Statutory Rights Analysis Is Inapplicable to Diversity Claims

The Court dismissed Crewe's attempt to ignore the class action waiver in line with recent Second Circuit case law applying a vindication of plaintiff's federal statutory rights analysis to antitrust claims. See, e.g., In re American Express Merchants Litigation, 554 F.3d 300 (2d Cir. 2009) ("Amex I"), aff'd 681 F.3d 139 (2d Cir. 2012) ("Amex IV"). Based on this theory, Crewe contended that his arbitration clause was "inconsistent with 'the federal substantive law of arbitrability'" in that an arbitration clause is enforceable under the Federal Arbitration Act "only 'so long as the prospective litigant may vindicate [his or her] statutory cause of action in the arbitral forum.'" Crewe argued that he would not be able to vindicate his rights in arbitration because of the class action waiver limiting him to an individual proceeding, the relative small damages he sought, and the "loser-pays fee-shifting provision" contained in the arbitration clause. In rejecting this argument, the Court made clear that the Second Circuit's Amex line of decisions limited the "vindication of statutory rights analysis" to situations "where plaintiffs' rights under federal statutes are effectively incapable of vindication given the limitations imposed by the arbitral format and rules." Since "Crewe's damages claims [were] all brought under state law" and did not implicate any "federal statutory rights," the vindication of federal statutory rights analysis did not apply.

5.         Class Action Waiver Not Unconscionable

The Court determined that the class action waiver and the arbitration clause were neither substantively nor procedurally unconscionable under Florida law. Crewe failed to show procedural unconscionability, in part because he was not contracting for "a necessity, with little practical ability to resist" but rather signed the contract with the arbitration clause under "his own internal impulsion to enroll in [a] stock-trading course at the lowest available price." The right to cancel this contract within three days further afforded Crewe the "opportunity to read the [contract terms], to reflect on the arbitration clause, and to decide to back out." The class action waiver was not substantively unconscionable because the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), "approved of [class action] waivers as advancing legitimate goals" and because the Federal Arbitration Act preempts any Florida "decisional rule" invalidating arbitration clauses on the ground that class action waivers reduce incentives for counsel to represent plaintiffs with small claims such as Crewe. See Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011). In addition, the fee-shifting provisions in Crewe's arbitration clause actually provided for the prevailing party "to obtain all reasonable costs" which would be "a substantial incentive to bring a genuinely meritorious claim."

6.         There Was a Clear and Unmistakable Delegation Provision

Finally, the Court addressed the issue of whether an arbitrator, not a court, should have decided Crewe's unconscionability claims. As the Supreme Court held in Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), parties may agree to delegate "'gateway' questions of arbitrability" to the arbitrator. Crewe's agreement contained "a clear and unmistakable" provision assigning questions of "scope, enforceability, and effect" of the arbitration clause to the arbitrator. The Court found that "under Rent-A-Center, Crewe was contractually bound to raise his claim of unconscionability with an arbitrator, not this Court." But in this case, the Court decided the issue of unconscionability because Crewe "refused to identify" a forum in which he would be prepared to arbitrate and because a valid unconscionability claim would create a "circular feedback loop" where "the use of an arbitrator to decide the 'gateway' issue of arbitrability" could be "called into question."

As a result, the Court dismissed all of Crewe's claims, with prejudice, because the binding arbitration clause was enforceable and because any challenge to the arbitration clause should have been brought before an arbitrator, not a court.