Sunday, February 19, 2012

FYI: 3rd Cir Requires Arbitration and Appointment of Substitute Arbitrator, When Designated Arbitrator Not Available and Not "Integral"

The U.S. Court of Appeals for the Third Circuit recently held that the Federal Arbitration Act required enforcement of an arbitration provision in a consumer sales agreement, and appointment of a substitute arbitrator, where the arbitrator expressly designated in the agreement was unavailable but not "integral" to the arbitration clause.
A copy of the opinion can be found at: 
Plaintiff-Appellee filed a putative class action against a consumer computer desktop company (Company), asserting various claims including breach of warranty, fraud, and misrepresentation.  The plaintiff claimed that the computer he purchased from Company suffered from design defects that harmed his computer and necessitated multiple replacements of a critical computer component. 
Company moved to compel arbitration.  The arbitration provision specifically provided that the parties would submit disputes between them to arbitration administered by the National Arbitration Foundation (NAF).  The arbitration provision also specified that any arbitration between the parties would be governed by the Federal Arbitration Act, 9 U.S.C. § 1-16 (FAA).   
Plaintiff argued that, because NAF had been barred from conducting consumer arbitrations as the result of a consent judgment in unrelated litigation, NAF's unavailability to conduct the arbitration allowed the dispute to be resolved through litigation.  Plaintiff claimed that NAF's designation as the arbitral forum was integral to the arbitration provision and that NAF's unavailability thus rendered the arbitration provision unenforceable.   
The district court denied Company's motion, ruling that the appointment of NAF as the arbitrator was integral to the arbitration provision and that the appointment of a substitute arbitrator would improperly force the parties to resolve the dispute before an arbitrator they had not agreed on. 
The Third Circuit vacated the lower court's judgment and remanded.
As you may recall, Section 5 of the FAA provides that a court "shall designate" an arbitrator upon application of either party to an agreement, where the arbitrator designated in the agreement becomes unavailable.  See 9 U.S.C. § 5 ("if .  .  . there shall be a lapse in the naming of an arbitrator . . . or in filling a vacancy, then upon application of either party . . . the court shall designate and appoint an arbitrator .  .  .  who shall act  .  .  .  with the same force and effect as if he  . . . had been specifically named [in the agreement]" ).
Following essentially the same analysis employed by other courts that addressed the question of a designated arbitrator's unavailability, the Third Circuit focused on whether the parties' designation of NAF as the arbitrator was "integral" to the arbitration provision or merely ancillary to their intent to submit disputes to arbitration.  The Court observed that unless "the parties  . . . have unambiguously expressed their intent not to arbitrate their disputes in the event that the designated arbitral forum is unavailable," Section 5 of the FAA requires the appointment of a substitute arbitrator upon application by either party. 
In ruling for enforcement of the arbitration provision, the Third Circuit rejected plaintiff's assertions that NAF's designation was integral to the arbitration provision and that language in the sales contract providing that all disputes "shall be resolved exclusively and finally by binding arbitration administered by the [NAF]" meant that, in the event NAF were not available, disputes should not be resolved by arbitration.  The Court concluded that the contractual language was ambiguous as to whether NAF's exclusive designation was integral to the arbitration provision or whether the parties' intent to arbitrate trumped NAF's designation as the arbitrator.  In addition, the Court noted that the sales contract specifically incorporated NAF rules, which required that they be interpreted in accordance with the FAA. 
Citing the "liberal federal policy in favor of arbitration," the Third Circuit ruled that the FAA's mechanism for the appointment of a substitute arbitrator required resolving any ambiguity in favor of enforcement of the arbitration provision.  In so ruling, the Third Circuit held that the lower court's conclusion to the contrary was "at odds with the fundamental presumption in favor of arbitration."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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