Henry Allen Blair | Stinson | August 9, 2019
I can’t believe we’re more than a week into August! I don’t know about you, but I feel like I’m going to have to say goodbye to summer too soon. I love fall, so maybe that’s not so bad?
Anyway, speaking of farewells, this week we get a back-to-the-basics refresher from the Eleventh Circuit on waving bye-bye to the right to arbitrate. Although the particulars involved a consumer arbitration agreement, the key reasoning applies more broadly to all arbitrations.
In Freeman v. SmartPay Leasing, LLC, 771 Fed.Appx. 926 (11th Cir. 2019), SmartPay and Freeman entered into an agreement providing that the party initiating arbitration could choose either the AAA or JAMS rules and administrative services.
Freeman had a beef with SmartPay. So, she sued SmartPay in federal district court. Shortly thereafter, the parties filed a joint motion to stay and to refer the dispute to binding arbitration. Freeman selected JAMS as the arbitration forum, she filled out the required form, and she paid a $250 initial filing fee.
This is where things went off the rails. SmartPay alleged that there were important procedural differences between the parties’ arbitration agreement and the JAMS rules. The details aren’t overly important, but the gist is that SmartPay argued those differences meant that this wasn’t truly a “consumer arbitration” under JAMS rules. (Basically, SmartPay didn’t want to have to pay all of the costs of the arbitration, other than the initial $250 that Freeman paid.)
JAMS didn’t buy it. It said that it wouldn’t administer the “consumer arbitration” unless and until SmartPay finished paying $950 in filing fees and waived any provisions in the parties’ agreement contrary to JAMS’s Consumer Minimum Standards. SmartPay stood firm by its position that this wasn’t a “consumer arbitration.” So it refused to pay the balance of filing fee. It ultimately took the position that if JAMS wouldn’t administer the arbitration, the case would have to be dismissed and refiled with the AAA.
JAMS did dismiss, but Freeman opted not to refile with the AAA. Instead, she went back to the district court and asked that the stay be lifted. She argued that SmartPay had waived its right to demand arbitration by refusing to pay the remaining initial filing fee. The district court agreed.
On appeal, the Eleventh Circuit noted that under FAA § 3, a district court should stay the litigation “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” Default includes waiver. Waiver, in turn, hinges on whether a party has acted inconsistently with the right to arbitrate and that inconsistent behavior has prejudiced the other party.
The Eleventh Circuit agreed that SmartPay had waived its rights by failing to pay the filing fee. In so doing, it said the issue of whether the alleged conflicts between the arbitration agreement and the JAMS rules could be reconciled was one for the arbitrator. By refusing to pay the balance of the initial filing fee, SmartPay acted inconsistently with its right to demand arbitration. In turn, that prejudiced Freeman because it precluded her from seeking relief through her chosen arbitral forum.
I’m sympathetic to SmartPay in one sense: JAMS seemingly required SmartPay to waive its procedural arguments before it even got into arbitration. That’s problematic. But the lesson of the case is that arbitral institutions aren’t arbitrators. SmartPay could have and should have made its procedural arguments to the arbitrator. It agreed to JAMS as a forum. Once it did, couldn’t escape that forum on the grounds that the forum was applying arguably the wrong rules. That should have been taken up with the arbitrator herself.