1. The State of Mandatory Arbitration in Tennessee after Berent v. CMH Homes Matthew R. Lyon Associate Dean for Academic Affairs Associate Professor of Law Lincoln Memorial University Duncan School of Law matthew.lyon@lmunet.edumatthew.lyon@lmunet.edu ● (865) 545-5318 matthew.lyon@lmunet.edu KBA ADR Section CLE October 5, 2015

2. Overview I.Introduction II.Taylor v. Butler (2004) III.Intervening U.S. Supreme Court Decisions IV.Berent v. CMH Homes (2015) V.The Aftermath of Berent

3. Introduction Mandatory individual arbitration clauses have been used with increasing regularity in order to discourage litigation and limit the costs of resolving disputes. Mandatory arbitration clauses are most familiar in consumer agreements, but are also used in many other contexts, including finance agreements and employment contracts. Such clauses take myriad forms, but they typically are drafted by the party with the greater bargaining power and inserted as boilerplate (non-bargained-for) provisions in the contract.

4. Introduction (cont.) State courts have a history of striking down one-sided arbitration provisions using common law avoidance doctrines such as unconscionability and public policy. However, in 2010, the U.S. Supreme Court indicated that the Federal Arbitration Act (“FAA”) preempts state policies in this area. Subsequent decisions by the Supreme Court have confirmed this. Berent v. CMH Homes provided the Tennessee Supreme Court with the first opportunity to reconsider some of its pre-2010 jurisprudence in this area in light of intervening U.S. Supreme Court action.

5. Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004) A buyer of a used car challenged the arbitration provision in the sales contract. The clause limited her to arbitration, but further stated: “Dealer, however, may pursue recovery of the vehicle under the Tennessee Uniform Commercial Code and Collection of Debt due by state court action.” The Court, in a 4-1 decision, invalidated the non-mutual arbitration clause as an unconscionable contract of adhesion, holding that the agreement “is unreasonably favorable to [the dealer] and oppressive to “[the buyer].” It severed the offending clause from the agreement.

6. AT&T Mobility, Inc. v. Concepcion, 563 U.S. 321 (2011) The Concepcions received a “free” cell phone when they signed a service contract with AT&T, but were charged $30.22 in sales tax. They filed a class action suit on behalf of all AT&T customers who had been similarly charged, but AT&T filed a motion to compel arbitration, pointing to a mandatory individual arbitration clause in its standard customer agreement. Several states had invalidated similar class action waivers as unconscionable, but the Court, in a 5-4 decision split along ideological lines, upheld this one.

7. Concepcion (cont.) The majority concluded that the FAA preempted state policies disfavoring mandatory arbitration clauses. The FAA’s “savings clause,” which allows invalidation of arbitration provisions “upon such grounds as exist at law or in equity for the revocation of any contract,” was not intended “to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Also, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Interpreted broadly, Concepcion seemed like a death knell for consumer class action litigation.

8. American Express Co. v. Italian Colors Restaurant, ___ U.S. ___, 133 S. Ct. 2304 (2013) An Oakland, CA restaurant alleged that AmEx violated federal antitrust laws by forcing excessive fees on merchants accepting the AmEx charge card. It filed a class action suit on behalf of itself and other merchants who signed the standard AmEx agreement. AmEx moved to compel arbitration, but the restaurant argued that it could not practically pursue the antitrust claims individually because the cost of procuring the necessary expert testimony would exceed, by many times, even treble damages it might be able to recover. This was known as the “effective vindication” doctrine.

9. American Express Co. (cont.) The Court reversed the Second Circuit and enforced the mandatory arbitration clause, for several reasons. The “effective vindication” rule set forth in the Court’s earlier decisions was merely dictum, and at any rate “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” These merchants still could pursue a Sherman Act remedy, albeit an expensive one. The case involves the same basic principle as Concepcion: “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the protection of low-value claims.”

10. Berent Facts The installment contract for sale of a mobile home included a provision requiring the parties to submit to mandatory, binding arbitration of all claims arising from or relating to the contract. The contract provided a carve-out to the mandatory arbitration clause, but only for the seller. Specifically, the seller could file a lawsuit to enforce its security interest in the property or seek injunctive relief to preserve the home’s existence, location, or condition. Thus, this presented a non-mutual arbitration provision similar to the one that had been invalidated in Taylor.

11. Berent v. CMH Homes, Inc., No. E2013-01214-COA-R3- CV, 2014 WL 813874 (Tenn. Ct. App. Feb. 28, 2014) The Court of Appeals (Susano, J.) agreed with the plaintiff’s argument and found this to be a straightforward application of Taylor. The non-negotiable provisions that gave seller access to the courts for its “most likely, and most significant, causes of action,” while at the same time limited the buyer to arbitration, were substantively unfair. The FAA’s “savings clause” authorizes states to strike arbitration clauses based upon “generally applicable contract defenses such as…unconscionability.” The decision did not cite to Concepcion at all.

12. Setting the Stage for the Tennessee Supreme Court’s Decision in Berent Concepcion and AmEx certainly did not compel the Tennessee Supreme Court to overrule Taylor v. Butler. The arbitration clauses at issue in in Taylor and Berent are very different from those at issue in the U.S. Supreme Court cases. They are distinguished by their lack of mutuality of obligation. However, it was conceivable that the state supreme court would interpret the FAA broadly and hold that Taylor v. Butler was no longer good law in the “modern era” of arbitration jurisprudence. Some states and lower federal courts had held similarly.

13. Berent v. CMH Homes, Inc., ___ S.W.3d ___, 2015 WL 3526984 (Tenn. June 5, 2015) In a unanimous opinion authored by Justice Kirby, the Court held that Taylor was still good law and not preempted by the FAA under Concepcion. This was because “Taylor applied the doctrine of unconscionability in a nuanced manner, weighing the degree of one-sidedness in the arbitration provision as an important factor, but not the only factor, and viewing the arbitration provision in context of the overall contract and the surrounding circumstances.” The ruling in Taylor is not a per se rule but merely “makes mutuality of remedies an important consideration in determining unconscionability.”

14. Berent (cont.) The Court drove home its statement that Taylor did not adopt a per se rule by upholding the arbitration clause in question despite its presence in a contract of adhesion and its lack of mutuality. It distinguished the arbitration provision in Taylor. That provision “was completely one-sided,” while the one in Berent “requires both parties to submit their disputes (except for small claims) to arbitration” but simply provides an exception that appears to be limited to judicial foreclosure proceedings. “[T]his type of ‘carve-out’ has generally been upheld as reasonable and not unfair to the consumer” elsewhere.

15. Berent Aftermath: The Parties The decision was obviously a win for Clayton and these claims entered arbitration. A couple of weeks earlier, the Missouri Supreme Court had similarly determined “[t]he lack of mutuality as to the arbitration agreement does not itself invalidate that arbitration agreement.” It declined to hold the provision unconscionable just because Clayton was “given the option of litigating the issues most important to it in court” but the buyer wasn’t. o Eaton v. CMH Homes, Inc., 461 S.W.3d 426 (Mo. 2015). A clause with carve-outs for both sides, however, was recently struck down by Ch. Bryant in McMinn Co. based upon a claim of fraudulent inducement.

16. Berent Aftermath: Tennessee The Court could have gone much further, but didn’t. It stretched Taylor in order to save it, but also retreated from that case’s most obvious interpretation. The distinguishing factor was whether the arbitration clause was “completely one-sided,” but based upon the Court’s analysis even a “completely one-sided” provision might survive depending on the circumstances. We also have the “circle of assent” doctrine – an alternate analysis of unconscionability – still floating around in Tennessee. That has never been given the Supreme Court’s stamp of approval, nor has it yet been applied in a case involving a mandatory arbitration clause.

17. Upcoming Mandatory Arbitration Cases at the U.S. Supreme Court DIRECTV Inc. v. Imburgia, No. 14-462 DIRECTV’s subscriber agreement compelled individual arbitration, but also stated it was unenforceable “[i]f the law of your state would find this agreement to dispense with class action procedures unenforceable.” When DIRECTV moved to compel after Concepcion, the intermediate appellate court in California held that the parties had bargained to apply California law, under which the provision was unenforceable. Of course, Concepcion held that the FAA preempted state law in this area. Oral arguments will be held tomorrow (10/06/15).

18. Upcoming Mandatory Arbitration Cases at the U.S. Supreme Court (cont.) MHN Gov't Servs. Inc. v. Zaborowski, No. 14-1458 A federal district court in California invalidated certain provisions of an arbitration provision in an employment contract as unconscionable. The district court applied a California rule refusing to sever offending portions of arbitration agreements “when multiple provisions of the contract permeate the entire agreement with unconscionability.” The dissenting judge argued the district court abused its discretion because “Concepcion and its progeny should create a presumption in favor of severance…” Cert was granted last Thursday (10/01/15).