May 31, 2019 BY Paul Grote
State and Federal Courts Continue to Reject Public Policy Challenges to Arbitration Clauses
Recent decisions by the Georgia Court of Appeals and the United States Supreme Court make it easier for parties to avoid court and resolve their disputes in arbitration. In each decision, a party sought to avoid arbitration by advancing arguments against arbitration based on public policy. The courts rejected these public policy type arguments, making it more difficult for a party to avoid arbitration when there is an arbitration clause that covers the suit or claim.
Many contracts contain an arbitration clause, which states that the parties agree to arbitrate disputes, rather than pursue the more common course of filing a lawsuit and litigating the matter in the traditional court system. Arbitration provisions often contain broad language, and therefore claims or lawsuits that involve parties to a contract may involve an arbitration clause that potentially covers the claims at issue. Where there is an arbitration clause, one party often prefers to avoid arbitration, leading to litigation before the courts about whether a case is subject to arbitration.
Depending on whether the transaction involves interstate commerce or not, there are two separate statutes that govern arbitration clauses for Georgia contracts. For transactions that involve interstate commerce, arbitration is governed by the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq. Galindo v. Lanier Worldwide, Inc., 241 Ga. App. 78, 80, 526 S.E.2d 141, 143 (1999). For Georgia based transactions that do not involve interstate commerce, the Georgia Arbitration Code, O.C.G.A. § 9-9-1 et seq. applies. Even if the Georgia Arbitrate Code applies, Georgia courts use federal cases under the Federal Arbitration Act as guidance for cases under the Georgia Arbitration Code. DBGS, LLC v. Kormanik, 333 Ga. App. 33, 35, 775 S.E.2d 283, 285 (2015).
In Summerville v. Innovative Images, LLC, A19A0258, -- S.E.2d --, 2019 WL 1219361, (Ga. Ct. App. Mar. 15, 2019), the Georgia Court of Appeals upheld an arbitration agreement clause contained in a law firm’s engagement letter. The former client sought to avoid arbitration by arguing the arbitration clause was unconscionable, and therefore unenforceable. The plaintiff argued that the law firm had not advised the plaintiff of the possible disadvantages associated with arbitration. In advancing this argument, the plaintiff relied on ethical rules requiring a lawyer to explain a matter to a client to the extent reasonably necessary to permit the client to make informed decisions.
The Georgia Court of Appeals rejected this argument. It first observed that the enactment of the Georgia Arbitration Code established a clear public policy in favor of arbitration. Further, the court noted that an arbitration clause is not unconscionable simply because the parties have differing levels of sophistication, or different understandings of how arbitration is conducted. The ruling also stated that as always, a party is presumed to have read and understood the contents of a contract signed by the party. Based on what the court described as the strong public of Georgia favoring arbitration, the Georgia Court of Appeals declined to adopt a blanket rule that an arbitration clause in an attorney-client contract is unconscionable if the potential disadvantages of the clause to were not explained to the prospective client. The court then held that the trial court should have compelled arbitration. While many arbitration clauses do not involve an attorney-client relationship, the Summerville decision is an example of a Georgia court upholding an arbitration clause even if there are countervailing strong public policy arguments that the arbitration clause should not be enforced.
The Supreme Court of the United States issued a recent opinion continuing the Court’s favorable treatment of arbitration clauses related to interstate commerce. The Supreme Court of the United States previously held that parties may agree to have the arbitrator, rather than the trial court, determine the gateway question of whether the case is subject to arbitration. Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 68–70, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943–944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Some Georgia decisions followed this line of cases in interpreting the Georgia Arbitration Code. Pickle v. Rayonier Forest Res., L.P., 282 Ga. App. 295, 297, 638 S.E.2d 344, 347 (2006). Under the “default rules”, if a party challenges the validity of an arbitration agreement while opposing a motion to compel arbitration, the court decides whether the arbitration clause covers the claims of the suit and whether the clause is enforceable. These default rules can be modified by a “delegation clause”, which states that the arbitrator will decide the gateway question of whether the case should be arbitrated. Put simply, a delegation clause provides that the parties agree to arbitrate whether a matter is subject to arbitration. Thus, if there is “clear and unmistakable” evidence that the parties wanted the arbitrator determine whether the dispute is subject to arbitration, the court must compel arbitration and allow the arbitrator to decide. First Options, 514 U.S. at 944.
After the decision in First Options, some circuits created a “wholly groundless” exception that allowed courts to refuse to compel arbitration even if a contract contained a “clear and unmistakable” delegation clause. Under this line of cases, even if a contract contained a delegation clause, a court could avoid allowing an arbitrator to determine the gateway question of whether the case was subject to arbitration by finding that the argument for arbitration was “wholly groundless.” In Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. --, 139 S. Ct. 524 (2019), the Supreme Court of the United States unanimously held that there is no “wholly groundless” exception to the Federal Arbitration Act. 139 S. Ct. at 529. In so holding, the Supreme Court rejected public policy arguments that the “wholly groundless” exception would deter frivolous motions to compel arbitration and would save time and expense by avoiding unnecessary arbitration proceedings and practices in cases that were clearly not subject to arbitration. After Schein, if the arbitration provision contains a delegation clause, courts must compel arbitration even if they believe the argument for arbitration is “wholly groundless.”
The decisions in Schein and Summerville show that arbitration clauses in Georgia courts, whether governed by the Georgia Arbitration Code or the Federal Arbitration Act, remain favored by some courts on public policy grounds. Parties who are considering arbitration or a motion to compel arbitration should take into account practical considerations. Many times arbitration may offer a faster alternative to the courts. Relaxed evidentiary rules and procedures may lead to savings in attorney fees and other litigation costs. Arbitration sometimes offers more privacy than court proceedings, and the parties may have more control of the arbitrator selected. However, other fees associated with arbitration may offset some of the savings. Arbitration entities often require a filing fee, which can vary based on the entity, the type of claim, and the amount in controversy. In addition to a filing fee, the parties must compensate the arbitrator. Some cases may be arbitrated for a relatively modest flat fee; other cases may require hourly compensation. Some arbitration agreements call for a panel of arbitrators, substantially increasing arbitration fees. In addition to filing fees and fees paid to the arbitrators, the arbitration entity may charge a separate fee for its case administration functions. Before seeking to compel arbitration, analysis of the fees and procedures of the arbitration entity will help a party make a better-informed decision about whether to arbitrate a case.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley