Arbitration under the Federal Arbitration Act (“FAA”) has been the hot topic of many cases in the past few years, with the U.S. Supreme Court having reaffirmed the federal policy favoring arbitration and the preemptive power of the FAA over state laws governing arbitration. The North Carolina courts are among those that have been petitioned to resolve conflicts regarding the enforceability of arbitration agreements, and the North Carolina Court of Appeals recently issued another arbitration decision that should be of interest to businesses facing disputes in this state. The public policy of North Carolina generally favors arbitration where valid arbitration agreements exist. In King v. Bryant, et. al, No. COA12-918 (N.C. Ct. App. Feb. 5, 2013), a patient sued his healthcare providers for malpractice and the defendants moved to compel arbitration pursuant to their existing arbitration agreement. The Court of Appeals recognized that a valid and enforceable arbitration agreement exists even where the parties have left open for later determination who will serve as arbitrators and the procedures that will govern the arbitration. This type of “agreement to agree” is sufficient under the FAA to bind the parties to arbitration, according to the North Carolina appellate court which reversed the trial court’s decision to the contrary. We highlight several key points in this post that businesses seeking to draft or enforce existing arbitration agreements can take away from King.
Does the FAA Apply – The Importance of Choice of Law Provisions. The court in King stressed the importance of first determining whether the FAA or the North Carolina Revised Uniform Arbitration Act governed the dispute, because the FAA preempts any conflicting state law. The FAA will apply in state and federal court, and will preempt conflicting state law, in cases with contracts evincing transactions in interstate commerce. This is so even if the arbitration agreement seeks to apply state law, and the court noted that companies cannot avert the FAA using choice of law provisions. However, King suggests that in cases where the FAA might not otherwise control, companies may avail themselves of the FAA by using unambiguous choice of law provisions in their arbitration agreements. The agreement in King contained the following provision: “In accordance with the terms of the Federal Arbitration Act, 9 USC 1-16, I agree that any dispute …shall be subject to final and binding resolution through private arbitration.” The King court stated that “[t]his language clearly suggests that the parties intended the FAA to govern administration of the Agreement,” and the court found no authority suggesting that parties “may not affirmatively choose the FAA to govern an agreement to arbitrate.”
Can You Agree to Agree on Arbitrators & Procedure? The trial court in King held that material terms of the arbitration agreement were indefinite and therefore no binding contract existed because the agreement stated:
The parties to this Agreement shall agree upon three Arbitrators and at least one arbitrator of the three shall be a physician licensed to practice medicine and shall be board certified in the same specialty as the physician party. The remaining Arbitrators either shall be licensed to practice law in NC or licensed to practice medicine in NC. The parties shall agree upon all rules that shall govern the arbitration, but may be guided by the Health Care Claim Settlement Procedures of the American Arbitration Association, a copy of which is available to me upon request.
However, the Court of Appeals reversed this decision based on 9 U.S.C. § 5 (2011), the provision of the FAA that provides for the appointment of arbitrators if the parties cannot agree, and U.S. Supreme Court precedent which provides arbitrators with authority to determine procedural issues. Under the FAA, the court may appoint a single arbitrator or panel of arbitrators upon the application of either party to the arbitration agreement if the method provided for selection of an arbitrator fails. “Accordingly, the failure of the parties to agree on a panel of arbitrators does not render the Agreement indefinite,” the Court of Appeals stated. With respect to procedural issues, the King court relied upon United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 40 (1987) (citing John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) which provides that “when the subject matter of a dispute is arbitrable, ―procedural questions which grow out of the dispute and bear on its final disposition are to be left to the arbitrator.” The Court of Appeals found that this authority granted to arbitrators to determine procedure prevents the parties’ agreement to agree on procedures from invalidating the arbitration agreement.
The King court noted that, similar to the FAA, a provision of the North Carolina Revised Uniform Arbitration Act – N.C. Gen. Stat. 1-569.11(a) – allows for the court to appoint arbitrators if the parties cannot agree. And, although not addressed by the King court, it is worth noting that the North Carolina Revised Uniform Arbitration Act – N.C. Gen. Stat. 1-569.15 – grants arbitrators authority to “conduct an arbitration in the manner the arbitrator considers appropriate for a fair and expeditious disposition of the proceeding.” So, following the King court’s reasoning, an agreement to agree on the appointment of arbitrators and procedure may not render the arbitration agreement unenforceable under North Carolina law either. But, King provides a clear picture of the control companies may exert by crafting the choice of law provision of their arbitration agreements to explicitly require the application of the FAA and preempt any contradictory state law.
But Wait – Is the Arbitration Agreement Unconscionable? Interestingly, the Court of Appeals in King declined to decide whether the arbitration agreement between the plaintiff patient and defendant healthcare providers was unconscionable under North Carolina law because the trial court had not yet decided that issue. However, the appellate court provided guidance to the lower court which suggests that in North Carolina cases involving both contractual and fiduciary relationships, like physician/patient cases, the unconscionability analysis regarding arbitration agreements should differ than in the commercial or employment context. The Court of Appeals noted that “generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening the FAA.” While this is true, and it may be the case that special consideration should be given to the physician/patient relationship, the Supreme Court’s recent jurisprudence in cases like AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) and Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) strongly cautions states against applying their public policy considerations to categorically preclude the arbitration of certain types of claims in contravention of the FAA’s policy favoring arbitration. It will be interesting to see what the North Carolina trial court does with the unconscionability issue in King on remand.