W. D. of Pennsylvania Addresses Optional Appeal to Second Arbitration Tribunal

by Mark Kantor

It is very rare to see a court decision addressing whether an optional appeal to a second arbitration tribunal is available under the applicable arbitration agreement and arbitration rules to a party disappointed by a first tribunal’s arbitration award.  In DeMuth v. Navient Solutions, LLC, Civ. Action No. 17-675 (W.D. Pa., August 15, 2017), though, Judge Nora Berry Fischer of the US District Court for the Western District of Pennsylvania ruled that the question of whether an appeal of an American Arbitration Association (“AAA”) arbitration award is available under the AAA Optional Appellate Arbitration Rules and the applicable arbitration clause is a matter for the appellate arbitral tribunal to decide, not the court.

The facts in DeMuth involve a student loan, an unusual arbitration clause referring in possibly contradictory terms to an appeal of a first instance arbitration ruling to a second, three-personal arbitration tribunal, the AAA Consumer Arbitration Rules and the AAA/ICDR Optional Appellate Rules.  At bottom, Judge Fischer concluded that “Pursuant to the complete arbitration rule, ‘a district court should not entertain such a lawsuit challenging [an] arbitration award until the arbitration is complete and the award is final.’ Verizon Pa. LLC v. Communs. Workers of Am., Local 1300 , 216 F. Supp. 3d 530, 538 (E.D. Pa. Oct. 20, 2016) (citing Union Switch & Signal Div. Am. Standard, Inc. , 900 F.2d at 610).” She continued by adding, “More significantly, it is not for this Court to determine which rules apply to Defendant’s appeal and whether the same is permissible.”

To help readers understand Judge Fischer’s Order, it is useful to know the details of Rule A-1 of the AAA/ICDR Optional Appellate Rules. Notably, Rule 1-A prevents appeals of consumer disputes under standardized, adhesive arbitration clauses: “where the arbitration clause is contained in an agreement between individual consumers and businesses where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices.”

Rule A-1 states (emphasis in original):

A-1. Agreement of Parties

Whenever, by stipulation or in their contract, the parties have provided for the appeal of an arbitration award* (“Underlying Award”) rendered under the auspices of the American Arbitration Association (AAA), or the International Centre for Dispute Resolution® (ICDR®), or have otherwise provided for these Appellate Arbitration Rules, they shall be deemed to have made these Rules, as amended and in effect as of the date of submission of the appeal, a part of their agreement.

*These Appellate Rules do not apply to disputes where the arbitration clause is contained in an agreement between individual consumers and businesses where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices.

In one sense, the Court’s decision in DeMuth is rather obvious, since it relies on two basic US-law principles: (1) an arbitration award may not be challenged in court until final; and (2) questions of arbitrability under arbitration rules are for the arbitrators when those rules so provide.  But the context (the availability of an appeal in arbitration) is sufficiently unusual to justify taking the time to consider Judge Fischer’s ruling, especially as it relates to finality. Notably, the Court relied upon judicial precedents from commercial, international and labor as well as consumer arbitrations in reaching its conclusions, regardless of the fact that this was a consumer arbitration – a reminder that all such arbitrations are generally subject to one piece of Federal legislation in the US (the Federal Arbitration Act).

Judge Fischer’s actual Memorandum Order is rather short.  So, instead of summarizing, I quote her Order below in its entirety (with redactions of cross-references to the docket).

… After careful consideration of the parties’ submissions; the contractual agreement between the parties; the arbitrator’s opinion and award; the Federal Arbitration Act (“FAA”); the American Arbitration Association’s (“AAA”) Optional Appellate Arbitration Rules; the Consumer Arbitration Rules; Defendant’s pending appeal of the arbitration award before the AAA; the standards governing motions to dismiss set forth by the Supreme Court in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and as articulated in Third Circuit precedent, see, e.g., Connelly v. Lane Const. Corp., 809 F.3d 780, 790 (3d Cir. 2016); and for the following reasons, Defendant’s Motion to Dismiss…, is GRANTED, without prejudice to Plaintiff’s right to challenge a final award.

By way of background, Plaintiff signed a Signature Student Loan Application and Promissory Note (“the Note”) on February 23, 2007. …. Section Q of the Note provides:

ARBITRATION AGREEMENT — READ CAREFULLY

You and I agree that either party may elect to arbitrate — and require the other party to arbitrate — any Claim under the following terms and conditions. This Arbitration Agreement is part of the Signature Student Loan Promissory Note (“Note”).

…On May 27, 2016, Plaintiff filed an action against Defendant before the AAA, alleging violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. (“TCPA”). … On May 11, 2017, the arbitrator concluded that Defendant had violated the TCPA and awarded Plaintiff $309,000.00, to be reduced by $15,702.95 as an offset of the amount due on the loan, for a total award of $293,297.05. … After Defendant filed an application for a modification of the award, the arbitrator corrected his mathematical errors on June 21, 2017, and awarded Plaintiff $300,000.00, to be reduced by $15,702.95, for a total award of $284,297.05. …

Section Q.7 of the Note states:

EFFECT OF ARBITRATION AWARD — Any court with jurisdiction may enter judgment upon the arbitrator’s award. The arbitrator’s award will be final and binding, except for: (A) any appeal right under the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the “FAA”); and (B) Claims involving more than $50,000. For Claims involving more than $50,000, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo any aspect of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA.

… On May 16, 2017, Defendant’s counsel sent an e-mail to Plaintiff’s counsel stating that Defendant intended to appeal the award to a three-arbitrator panel. … On June 5, 2017, Defendant filed its AAA appeal under Case No. 01-16-0002-0590-02. … On June 29, 2017, the AAA sent a letter to Plaintiff and Defendant, wherein it acknowledged that the filing requirements had been met and stated that the Consumer Arbitration Rules are applicable. …

In support of its Motion to Dismiss, Defendant argues that Plaintiff’s action before this Court is premature because its appeal is pending before the AAA. … Citing Rule A-1 of the AAA Optional Appellate Rules, Plaintiff contends that Defendant’s appeal is barred because the arbitration agreement between the parties was a standardized form contract that is non-negotiable or substantially non-negotiable. … In reply, Defendant asserts that Rule A-1 does not prohibit the filing of AAA appeals and that the AAA’s Consumer Arbitration Rules apply to its appeal. …

Current federal law and the law in effect when the Note was signed strongly favor arbitration and the enforcement of arbitration agreements. “In enacting the FAA and providing for the enforcement of arbitration agreements through the federal courts, Congress intended to `reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts.'” Berkery v. Cross Country Bank, 256 F. Supp. 2d 359, 364 (E.D. Pa. Apr. 11, 2003) (quoting Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 89 (2000)). Section 9 of the FAA provides:

If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.

9 U.S.C. § 9. The United States Court of Appeals for the Third Circuit follows the “complete arbitration rule.” Union Switch & Signal Div. Am. Standard, Inc. v. United Elec., Radio & Mach. Workers, Local 610, 900 F.2d 608, 611 (3d Cir. 1990). Pursuant to the complete arbitration rule, “a district court should not entertain such a lawsuit challenging [an] arbitration award until the arbitration is complete and the award is final.” Verizon Pa. LLC v. Communs. Workers of Am., Local 1300, 216 F. Supp. 3d 530, 538 (E.D. Pa. Oct. 20, 2016) (citing Union Switch & Signal Div. Am. Standard, Inc., 900 F.2d at 610). “`Generally, an arbitrator’s decision is considered final when the arbitrator has completed his determination of every issue submitted by the parties.'” Id. (quoting Millmen’s Local 550, United Bhd. of Carpenters & Joiners v. Well’s Exterior Trim, 828 F.2d 1373, 1376 (9th Cir. 1987)).

Pursuant to this well-settled law, the Court finds that Plaintiff’s action is premature. Plaintiff opposes Defendant’s motion on the basis that Rule A-1 of the AAA Optional Appellate Rules prohibits an appeal. As Defendant has pointed out, however, after Defendant filed its appeal, the AAA sent a notice to the parties wherein it “acknowledge[d] that the filing requirements have been met” and stated that “[t]he Consumer Arbitration Rules have been applied to this matter.” …. More significantly, it is not for this Court to determine which rules apply to Defendant’s appeal and whether the same is permissible. See AAA Optional Appellate Arbitration Rules, Rule A-13 … (effective Nov. 1, 2013) (stating that “[t]he appeal tribunal shall interpret and apply these rules insofar as they relate to the appeal tribunal’s powers and duties”); AAA Consumer Arbitration Rules, Rule 53 … (effective Sept. 1, 2014) (stating that “[t]he arbitrator shall interpret and apply these Rules as they relate to the arbitrator’s powers and duties”). Thus, the Court will grant Defendant’s motion. See, e.g., Verizon Pa. LLC, 216 F. Supp. 3d at 531 (granting motion to dismiss and finding that arbitration was not final because the defendant had filed suit seeking to vacate the award); see also Hulley Enters. v. Russian Fed’n, 211 F. Supp. 3d 269, 288 (D.D.C. 2016) (holding that arbitration award could not be confirmed until appeal proceedings in the Court of Appeal of The Hague were completed); EDF Int’l S.A. v. YPF S.A., 676 F. Supp. 2d 317, 320 (D. Del. 2009) (holding that confirmation of an award would occur after the arbitral tribunal’s court of appeals resolved the parties’ respective appeals).

Until he retired from Milbank, Tweed, Hadley & McCloy LLP, Mark Kantor was a partner in the Corporate and Project Finance Groups of the Firm and resident in the Washington, D.C. office. He serves as an arbitrator and mediator in commercial and investment disputes, and as an Adjunct Professor at the Georgetown University Law Center. You may read more about Mr. Kantor at www.mark-kantor.com.

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