Joyce Green v. U.S. Cash Advance Illinois

In the

United States Court of Appeals

For the Seventh Circuit

No. 13-1262

JOYCE G REEN,

Plaintiff-Appellee,

v.

U.S. C ASH A DVANCE ILLINOIS, LLC, and

T ITLE L OAN C OMPANY, both doing business as

The Loan Machine,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 12 C 8079—Joan B. Gottschall, Judge.

A RGUED JUNE 5, 2013—D ECIDED JULY 30, 2013

Before EASTERBROOK, Chief Judge, and BAUER and

HAMILTON, Circuit Judges.

E ASTERBROOK, Chief Judge. Joyce Green contends that

U.S. Cash Advance, from which she borrowed money,

misstated the loan’s annual percentage rate and so

violated the Truth in Lending Act, 15 U.S.C. §1606. The

lender asked the district judge to stay the litigation

and direct arbitration under ¶17 of the loan agreement:

2 No. 13-1262

ARBITRATION: All disputes, claims or contro-

versies between the parties of this Agreement,

including all disputes, claims or controversies

arising from or relating to this Agreement, no

matter by whom or against whom, including the

validity of this Agreement and the obligations

and scope of the arbitration clause, shall be re-

solved by binding arbitration by one arbitrator

by and under the Code of Procedure of the Na-

tional Arbitration Forum. This arbitration agree-

ment is made pursuant to a transaction in inter-

state commerce, and shall be governed by the

Federal Arbitration Act at 9 U.S.C. Section 1. The

parties agree and understand that they choose

arbitration instead of litigation to resolve dis-

putes. The parties understand that they have

a right or opportunity to litigate disputes

through a court, but that they prefer to resolve

their disputes through arbitration, except as pro-

vided herein. THE PARTIES WOULD HAVE

HAD A RIGHT OR OPPORTUNITY TO

LITIGATE DISPUTES THROUGH A COURT

BUT HAVE AGREED TO RESOLVE DISPUTES

THROUGH BINDING ARBITRATION, EXCEPT

THAT THE TITLE LENDER MAY CHOOSE AT

TITLE LENDER’S SOLE OPTION TO SEEK COL-

LECTION OF PAYMENT(S) DUE IN COURT

RATHER THAN THROUGH ARBITRATION.

THE PARTIES VOLUNTARILY AND KNOW-

INGLY WAIVE ANY RIGHT THEY HAVE TO A

JURY TRIAL EITHER PURSUANT TO ARBITRA-

No. 13-1262 3

TION UNDER THIS CLAUSE OR PURSUANT

TO A COURT ACTION BY TITLE LENDER. The

parties agree and understand that all other laws

and actions, including, but not limited to, all

contract, tort and property disputes will be

subject to binding arbitration in accord with this

Agreement.

The agreement was signed on May 8, 2012. But the Na-

tional Arbitration Forum has not been accepting new

consumer cases for arbitration since July 2009, when it

settled a suit by Minnesota’s Attorney General, who

believed that the Forum was biased in merchants’ fa-

vor. The lender asked the district court to appoint a

substitute arbitrator under 9 U.S.C. §5. The judge

declined, stating that the identity of the Forum as the

arbitrator is “an integral part of the agreement”, that ¶17

is void, and that the dispute will be resolved on the

merits in court. 2013 U.S. Dist. L EXIS 11346 (N.D. Ill. Jan. 25,

2013). The lender has taken an interlocutory appeal, as

9 U.S.C. §16(a)(1)(B) permits.

The district judge’s belief that ¶17 requires the arbitra-

tion to be conducted by the Forum departs from its lan-

guage, which says that any dispute “shall be resolved

by binding arbitration by one arbitrator by and under

the Code of Procedure of the National Arbitration Fo-

rum.” (Emphasis added.) The agreement calls for use of

the Forum’s Code of Procedure, not for the Forum itself

to conduct the proceedings. If ¶17 were designed to

require arbitration to be conducted by the Forum ex-

clusively, the reference to its Code would be surplusage;

4 No. 13-1262

the only reason to refer to the Code is to create the possi-

bility of arbitration outside the Forum’s auspices, but

using its rules of procedure.

Green observes that Rule 1.A of the Code includes

this language: “This Code shall be administered only

by the National Arbitration Forum or by any entity or

individual providing administrative services by agree-

ment with the National Arbitration Forum.” Rule 48.C

qualifies this, however: “In the event a court of

competent jurisdiction shall find any portion of this

Code … to be in violation of the law or otherwise unen-

forceable, that portion shall not be effective and the

remainder of the Code shall remain effective.” Rule 48.D

continues: “If Parties are denied the opportunity to arbi-

trate a dispute, controversy or Claim before the Forum,

the Parties may seek legal and other remedies in accord

with applicable law.” One would suppose that 9 U.S.C. §5

is such an “applicable law.”

Rule 1.A is “unenforceable” in light of the Forum’s

decision to cease conducting arbitrations. What’s more,

no author can control how or by whom a written work is

used. Copyright law allows owners to decide how to

use the texts; a declaration at the beginning of a detec-

tive novel that the reader must follow the text consecu-

tively would not prevent the reader from skipping to

the end to learn whodunit. The list of exclusive rights,

17 U.S.C. §106, does not include a right to control how

the owner of a copy uses the information it contains. Cf.

Baker v. Selden, 101 U.S. 99 (1879) (despite the author’s

prohibition, the buyer of a book may make and sell

No. 13-1262 5

forms that implement the book’s ideas); American Dental

Association v. Delta Dental Plans Association, 126 F.3d 977

(7th Cir. 1997). Patent law allows a proprietor to con-

trol how a patented article is used; with the exception of

the rights in §106, copyright law does not. The Forum

does not require buyers to sign contracts promising to

use the Code in whole, or not at all. Compare ProCD,

Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). So the

exclusivity claim in Rule 1.A is not enforceable, and

an agreement to conduct arbitration under the Forum’s

Code, with the Forum itself on the sidelines, is valid.

Rules 48.C and 48.D say as much. All that remains is

the selection of an arbitrator, and a district court can

use §5 to make the appointment.

Suppose this is wrong and that an arbitrator is for-

bidden to use the Forum’s Code of Procedure but

must employ different rules. Would that affect the desir-

ability of arbitration, from either a lender’s perspective

or a customer’s? If, as the district judge thought, the

designation of the Forum (or at least of its Code) is “inte-

gral” to the agreement, this implies a belief that the

customer, the lender, or both would rather litigate than

arbitrate under any other rules or in any other forum.

Does that belief have any support? When the Forum

stopped accepting arbitrations, did any merchant revise

its contracts to eliminate the arbitration clause? Has

any customer insisted on the Forum as a condition of

agreeing to arbitration? The district court did not

identify anyone, ever, for whom the answer has been “the

National Arbitration Forum or no arbitration at all.”

6 No. 13-1262

Two courts of appeals have held that the identity of

the Forum as arbitrator is not “integral” to arbitration

agreements and that §5 may be used to appoint a sub-

stitute. Kahn v. Dell, Inc., 669 F.3d 350 (3d Cir. 2012);

Pendergast v. Sprint Nextel Corp., 691 F.3d 1224, 1236 n.13

(11th Cir. 2012); Brown v. ITT Consumer Financial Corp.,

211 F.3d 1217, 1222 (11th Cir. 2000). The Supreme

Court must have assumed this in CompuCredit Corp. v.

Greenwood, 132 S. Ct. 665 (2012), which held that claims

under the Credit Repair Organizations Act are arbitrable.

The agreement in that case specified use of the Forum,

see id. at 677 n.2 (Ginsburg, J., dissenting), yet the Court

saw no obstacle to enforcing the arbitration clause.

We grant that Ranzy v. Tijerina, 393 Fed. App’x 174 (5th

Cir. 2010), deems designation of the Forum “important”

to arbitration and makes an agreement unenforceable

once the Forum becomes unavailable, but Ranzy is not

precedential. The decisions of the third and eleventh

circuits, and the assumption of the Supreme Court,

deserve greater weight.

Ranzy relied on In re Salomon Inc. Shareholders’ Derivative

Litigation, 68 F.3d 554 (2d Cir. 1995). The agreement in

that case named the New York Stock Exchange as the

exclusive forum for private dispute resolution. The Ex-

change’s rules gave it discretion whether to hear a

dispute or send the parties to court. The Exchange’s

Secretary thought that litigation would be preferable

(the dispute arose from allegations that traders had

rigged the trading price of Treasury securities), and the

Exchange’s Board agreed. After the Exchange returned

the case to court, the district judge declined to appoint

No. 13-1262 7

a substitute arbitrator under §5. The second circuit af-

firmed, observing among other things that the parties

had bargained not only for the Stock Exchange as the

sole private forum but also for a procedure under

which the Exchange could decide that litigation

would be preferable. To use §5 to appoint a substitute

arbitrator would be to defeat both aspects of the con-

tractual choice and override the chosen arbitrator’s deci-

sion. Paragraph 17 of the agreement between Green

and U.S. Cash Advance differs in both respects that the

second circuit thought important. It does not name

the Forum as an “exclusive” private adjudicator, and it

does not refer the dispute to a body that had, and used,

discretion to send it back to court.

Salomon implemented the parties’ agreement that the

chosen arbitrator may rule in favor of litigation. Green

wants us to defeat her agreement with the lender—for

that agreement conclusively chooses private dispute

resolution. We are skeptical of decisions that allow a

court to declare a particular aspect of an arbitration

clause “integral” and on that account scuttle arbitra-

tion itself. Section 5 reads:

If in the agreement provision be made for a

method of naming or appointing an arbitrator or

arbitrators or an umpire, such method shall be

followed; but if no method be provided therein, or

if a method be provided and any party thereto

shall fail to avail himself of such method, or if

for any other reason there shall be a lapse in the

naming of an arbitrator or arbitrators or umpire,

or in filling a vacancy, then upon the application

8 No. 13-1262

of either party to the controversy the court shall

designate and appoint an arbitrator or arbitrators

or umpire, as the case may require, who

shall act under the said agreement with the

same force and effect as if he or they had been

specifically named therein; and unless other-

wise provided in the agreement the arbitration

shall be by a single arbitrator.

This tells us that arbitration clauses remain enforceable

if for “any” reason there is “a lapse in the naming of an

arbitrator”. When a court declares that one or another

part of an arbitration clause is “integral” and that the

clause is therefore unenforceable as a matter of federal

common law, it is effectively disagreeing with Congress,

which provided that a judge can appoint an arbitrator

when for “any” reason something has gone wrong.

Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576

(2008), tells courts not to add to, or depart from, the

standards in the Federal Arbitration Act. An “integral

part” proviso to §5 sounds like the sort of addendum

that Hall Street forbids.

Section 2 of the Arbitration Act could provide a better

foundation for an “integral part” escape hatch. Section 2

says that arbitration agreements are enforceable “save

upon such grounds as exist at law or in equity for the

revocation of any contract.” This includes all general

principles of state law, though not any arbitration-

specific doctrines. See, e.g., Marmet Health Care Center, Inc.

v. Brown, 132 S. Ct. 1201 (2012); AT&T Mobility LLC v.

Concepcion, 131 S. Ct. 1740 (2011). So if an error—

No. 13-1262 9

such as the parties’ mutual, but mistaken, belief that

the National Arbitration Forum was available—would

permit revocation of the contract under ordinary state-

law principles, the district court could declare the con-

tract as a whole unenforceable. But neither side has

asked for that relief or even contended that it would

be possible under state law. The identity of the arbitrator

is not so important that the whole contract is vitiated.

Nor does either side contend that a mutual mistake of

fact allows ¶17 to be excised as a matter of general

contract law.

The origin of the “integral part” approach appears to

be dictum in Zechman v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 742 F. Supp. 1359 (N.D. Ill. 1990). We cannot

find an earlier use of the word “integral” in connection

with §5 of the Federal Arbitration Act. In the course

of granting an employer’s motion to arbitrate a dispute,

the district judge observed in passing that the choice of

a particular forum was not “integral” to the parties’

bargain. The opinion did not say why an affirmative

answer would matter or give any legal reason for

asking the question, though it did cite National Iranian

Oil Co. v. Ashland Oil Co., 817 F.2d 326, 328 (5th Cir. 1987),

which had asked whether a particular forum was an

“essential part of the [parties’] bargain.” The fifth

circuit did not discuss §5 (National Iranian Oil con-

cerned forum selection, not the availability of the par-

ties’ chosen arbitrator) or specify the provenance

of the “essential part” inquiry, though by citing the Re-

statement of Contracts and its doctrine of severability it

implied a source in common law. In the fashion of a

10 No. 13-1262

rumor chain, later decisions picked up on and elaborated

the language of these two decisions. Today opinions

such as Kahn and Ranzy proceed as if it were an

established rule of law that §5 cannot be used to

appoint a substitute arbitrator when the contractual

designation was an “integral part” of the bargain, and

they proceed to disagree about whether a given designa-

tion is “integral.”

As far as we can tell, no court has ever explained

what part of the text or background of the Federal Ar-

bitration Act requires, or even authorizes, such an ap-

proach. In recent years the Supreme Court has insisted

that the Act not be added to in a way that overrides

contracts to resolve disputes by arbitration. American

Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013),

is the most recent in this line of decisions. The Court

observed in American Express (id. at 2311–12) that adding

requirements to the Act can prevent arbitration from

being a fast and economical process. That’s true of an

“integral part” inquiry. How could a district judge tell

what is “integral” without a trial at which parties testify

about what was important to them and lawyers present

data about questions such as whether consumers or

businesses shifted from arbitration to litigation when

the Forum stopped accepting new consumer disputes

for resolution? The process would be lengthy, expen-

sive, and inconclusive to boot.

Instead of asking whether one or another feature is

“integral,” a court could approach this from a different

direction and assume that a reference to an unavailable

No. 13-1262 11

means of arbitration is equivalent to leaving the issue

open. What if an arbitration clause were shorn of de-

tails? What if it did not specify how many arbitrators,

what forum, or any other administrative matters?

Suppose ¶17 read, in full: “Any disputes arising out

of this contract will be arbitrated.” Could a court then

use §5 to supply particulars? If it could, then it would

be hard to see any problem using §5 in the dispute

between Green and U.S. Cash Advance.

The answer is yes. Section 5 applies “if no method be

provided” in the contract—that is, if the parties use the

sort of detail-free clause we have just imagined. We

held in Schulze and Burch Biscuit Co v. Tree Top, Inc., 831

F.2d 709, 715–16 (7th Cir. 1987), that a clause providing

that “all disputes under this transaction shall be

arbitrated in the usual manner” could be implemented

through judicial orders under §5 even though the

parties had not established any “usual manner.” Other

circuits likewise have used §5 to complete detail-free

arbitration clauses. See, e.g., Bethlehem Mines Corp. v.

United Mine Workers, 494 F.2d 726, 730 (3d Cir. 1974);

Deaton Truck Line, Inc. v. Local Union 612, 314 F.2d 418,

421 (5th Cir. 1962); Plumbing and Pipefitting Association

v. Bechtel Construction Co., 128 F.3d 1318, 1320–24 (9th

Cir. 1997); Blinco v. Green Tree Servicing LLC, 400 F.3d

1308, 1310–13 (11th Cir. 2005).

Paragraph 17 makes one thing clear: These parties

selected private dispute resolution. Courts should not use

uncertainty in just how that would be accomplished

to defeat the evident choice. Section 5 allows judges to

12 No. 13-1262

supply details in order to make arbitration work. The

district judge must appoint an arbitrator, who will

resolve this dispute using the procedures in the National

Arbitration Forum’s Code of Procedure.

V ACATED AND R EMANDED

H AMILTON, Circuit Judge, dissenting. Despite the surface

simplicity of its logic, the majority has actually made

an extraordinary effort to rescue the payday lender-

defendant from its own folly, or perhaps its own fraud.

Because the district court correctly denied the motion

to compel arbitration, I respectfully dissent.

Arbitration is at bottom a matter of contract. E.g., Ameri-

can Express Co. v. Italian Colors Restaurant, 133 S. Ct.

2304, 2309 (2013); Rent-A-Center, West, Inc. v. Jackson, 561

U.S. ___, ___, 130 S. Ct. 2772, 2776 (2010). The Supreme

Court has instructed that “the FAA’s proarbitration

policy does not operate without regard to the wishes of

the contracting parties.” Mastrobuono v. Shearson Lehman

Hutton, Inc., 514 U.S. 52, 57 (1995). Yet the majority has

deconstructed and rebuilt the parties’ contract and now

imposes on plaintiff Green a requirement to arbitrate

that bears little resemblance in substance to the

underlying contract the parties actually signed. Along the

No. 13-1262 13

way, the majority even instructs district judges to fill in

all the missing terms when a contract says merely:

“Any disputes arising out of this contract will be arbi-

trated.” Slip op. at 11. That is akin to enforcing a contract

to sell “some quantity” of “some goods” at “some price.”

The majority’s reasoning departs from the con-

tractual foundation of arbitration. It puts courts in the

business of crafting new arbitration agreements for

parties who failed to come to terms regarding the

most basic elements of an enforceable arbitration agree-

ment. Section 5 of the Federal Arbitration Act need

not and should not be read to authorize such a

wholesale re-write of the parties’ contract. It certainly

should not be read to rescue an arbitration clause on

behalf of the clause’s author when the author knew or

should have known that its designated arbitrator was

unavailable. We should instead follow the reasoning

and holding of the Second Circuit in In re Salomon Inc.

Shareholders’ Derivative Litigation, 68 F.3d 554 (2d Cir. 1995),

and leave the parties to the court system when their

arbitration agreement fails as utterly as this one does.

To explain these conclusions, Part I reviews the

unusual facts underlying this appeal, which appear to be

unprecedented in federal appellate cases on section 5.

Part II turns to the majority’s principal theory and

explains how that theory strays so far from the terms of

the parties’ arbitration agreement and from the existing

appellate case law. Part III explains the principal flaws

in the majority’s broad dictum for salvaging impossibly

vague arbitration agreements.

14 No. 13-1262

I. The Unprecedented Facts

The chronology of this case provides a strong basis

for plaintiff Green’s allegations that the parties’ arbitra-

tion clause was itself a form of consumer deception

and oppression. In 2009, the Minnesota Attorney

General sued the National Arbitration Forum for

consumer fraud by, among other things, systematically

using arbitrators who were biased in favor of

businesses in disputes with their consumers. See In re

National Arbitration Forum Trade Practices Litig., 704

F. Supp. 2d 832, 835–36 (D. Minn. 2010) (denying motion

to dismiss in multidistrict litigation alleging consumer

fraud and racketeering by National Arbitration Forum,

and describing settlement of Minnesota state case). The

Forum retreated less than a week later by settling the

suit and announcing that it would no longer accept

new consumer cases for arbitration.1

Nearly three years later, on May 8, 2012, Green signed

her payday loan with defendant U.S. Cash Advance,

providing for arbitration “by and under the Code of

1

The district court opinion in the MDL case provides a good

deal of helpful background information on the Forum,

including the results of Congressional hearings, described as

“rather shocking” by Judge Magnuson. 704 F. Supp. 2d at 835.

Before the 2009 settlement, the Forum had built a substantial

reputation as a pro-business arbitration forum. See Robert

Berner and Brian Grow, Banks v. Consumers (Guess Who Wins),

Businessweek, June 4, 2008, www.businessweek.com/stories/

2008-06-04/banks-vs-dot-consumers-guess-who-wins (last

visited July 25, 2013).

No. 13-1262 15

Procedure of the National Arbitration Forum.” When

U.S. Cash Advance was still providing for arbitration

by the Forum in 2012, was it being negligent

or deliberately deceptive? Under the majority’s deci-

sion, that question will not be answered in this law-

suit. Perhaps it might be answered in the arbitration

the majority orders, if Green and her lawyers can

afford to go forward at all.

The payday loan agreement that Green signed was

certainly a contract of adhesion. Green had no bargaining

power over its terms, including the arbitration clause.

The idea that she actually agreed, in a subjective sense,

to any arbitration clause at all therefore requires

some rather heroic assumptions. Under the FAA, though,

we must indulge the legal fiction and assume that she

read, understood, and embraced defendant’s carefully

drafted arbitration clause. Even with that assump-

tion—especially with that assumption—we should

affirm the district court’s denial of arbitration.

II. The Majority’s Holdings

A. The Details of the Parties’ Agreement to Arbitrate

The Supreme Court has said repeatedly that we

must “ ‘rigorously enforce’ arbitration agreements ac-

cording to their terms.” American Express, 133 S. Ct. at 2309,

quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213,

221 (1985), including terms that specify who will do

the arbitrating and according to which rules, American

Express, 133 S. Ct. at 2309. Putting aside the issue of

16 No. 13-1262

U.S. Cash Advance’s folly (or worse) in providing for

arbitration by the Forum, let’s look at what these par-

ties’ agreement actually meant. Our task is to deter-

mine (or construct) the parties’ mutual intention for

what would happen to their arbitration agreement

if the Forum was not available to do the arbitration—

which it was not at the time of the parties’ agreement.

The key phrase in the arbitration clause says that dis-

putes “shall be resolved by binding arbitration by one

arbitrator by and under the Code of Procedure of the

National Arbitration Forum.” I agree with the district

court that the phrase is a little clumsy, but it is clear

enough. Breaking the phrase down, there are four key

elements. First, use binding arbitration. Second,

use one arbitrator. Third, the arbitration will be done

“by … the National Arbitration Forum.” Fourth, the ar-

bitration will be done “under the Code of Procedure

of the National Arbitration Forum.” There is no indica-

tion that anyone other than the Forum was satisfactory

to the parties.

The majority strains the contractual language badly

by concluding that the reference to the Forum’s Code

would be “surplusage” if the parties meant for arbitra-

tion before the Forum to be exclusive, and that “the

only reason to refer to the Code is to create the possi-

bility of arbitration outside the Forum’s auspices, but

using its rules of procedure.” Slip op. at 3–4. The supposed

intent is just speculation, and the majority’s reading

is highly improbable. The natural reading of the rather

simple phrase “by and under the Code of Procedure of

No. 13-1262 17

the National Arbitration Forum” is that the arbitration

will be conducted both by the Forum and according to

its rules. The reference to the Forum’s Code of

Procedure is there to communicate clearly and remove

room for argument, not to allow for the possibility that

the Forum might not be available. (Any competent

drafter acting in good faith who even considered the

possibility the majority embraces surely would have

figured out that the Forum was already not available.)

Apart from the majority’s effort to avoid the natural

effect of the parties’ contractual language, the exclusivity

of the Forum is also found in the requirement of arbitra-

tion “under the Code of Procedure of the National Ar-

bitration Forum,” which effectively incorporated the

Code into the parties’ agreement. The Code shows in

two places the parties’ intent to have only the Forum

handle any arbitration.

First, Rule 1(A) states, “This Code shall be ad-

ministered only by the National Arbitration Forum or

by any entity or individual providing administrative

services by agreement with the National Arbitration

Forum.” We are supposed to enforce the contract

according to its terms. The terms of the parties’ contract

require application of the Forum Code. The Forum Code

requires that it be administered only by the Forum.

The majority’s decision here nullifies that requirement

and effectively nullifies the parties’ choice.

To avoid this simple logic, the majority uses a feint

towards copyright law, which has nothing at all to do

with this dispute, to declare Rule 1(A) “unenforceable.”

18 No. 13-1262

Slip op. at 4–5. If any branch of intellectual property law

is relevant to Rule 1(A), it is trademark law. The Forum’s

Rule 1(A), providing that only the Forum and its

affiliates can use its Code of Procedure, is designed to

protect the Forum’s brand and reputation. The majority

is correct that the Forum cannot prevent others from

reading or even using its Code of Procedure, with or

without adaptations. Copyright law would not help it.

But Rule 1(A) was not an empty gesture. The Forum

could rely on trademark law to try, at least, to prevent

competitors from holding themselves out as substitutes

for the Forum itself.

That reading also fits better with the reputation the

Forum had built for itself by the time it withdrew from

consumer arbitration. The value of its brand lay not

in the details of the Code of Procedure but in the

strongly pro-business reputation it had built with the

many businesses it persuaded to write their form

contracts to provide for arbitration of consumer

disputes with the Forum. Substitutes would have

diluted what was then the valuable reputation of the

Forum’s brand of consumer dispute resolution.

Second, the Forum’s Code also says that if the Forum

will not conduct the arbitration itself for some reason,

the parties are left to their “legal and other remedies.”

Rule 48(D) provides:

The Director or Arbitrator may decline the use of

arbitration for any dispute, controversy, Claim,

Response or Request that is not a proper or

legal subject matter for arbitration or where

the agreement of the Parties has substantially

No. 13-1262 19

modified a material portion of the Code. If

Parties are denied the opportunity to arbitrate a

dispute, controversy or Claim before the Forum,

the Parties may seek legal and other remedies

in accord with applicable law.

In other words, the terms of the Forum’s Code, chosen

by these parties, repeat that the Code provides for ar-

bitration by the Forum or by nobody. Since the Forum

made itself unavailable, that should mean arbitration

by nobody. The district court properly denied the

motion to compel arbitration.

To avoid Rules 1(A) and 48(D), the majority turns to

Rule 48(C), which provides a general severability clause:

“In the event a court of competent jurisdiction shall

find any portion of this Code … to be in violation of

the law or otherwise unenforceable, that portion shall

not be effective and the remainder of the Code shall

remain effective.” The majority first explicitly severs

the provision in Rule 1(A) that Forum arbitration is

arbitration by the Forum, and then severs Rule 48(D),

which would send disappointed seekers of arbitration

back to the courts. This methodology puts the court in

the uncomfortable position of picking and choosing

terms that promote arbitration and erasing the ones

that do not.

There is in fact no reason to use the severability clause

to nullify the important terms providing that Forum

arbitration can be provided only under the Forum’s

own auspices, with its cohort of trusted arbitrators, or

not at all. Given the choice between enforcing Rules 1(A)

and 48(D) and not enforcing them, the issue is not the

20 No. 13-1262

legality of the provisions under copyright law, as the

majority seems to think, but the parties’ intentions.

Rules 1(A) and 48(D) are both perfectly enforceable

between these parties. If courts are in the business of re-

specting the parties’ agreements, we should enforce

them by affirming the parties’ choice of rules, which

here required arbitration by the Forum and only

the Forum.

B. FAA Section 5 and Relevant Case Law

The majority builds upon the foundation of section 5

of the FAA to order the district court to appoint an ar-

bitrator to whom the parties never agreed, and to do

so without any instructions on how to make an appro-

priate selection. This part of the majority’s opinion not

only chooses the wrong side in a circuit split, but also

uses reasoning that no other circuit has adopted to go

farther to rescue a more deeply flawed arbitration agree-

ment than any other circuit has.

Section 5 provides, with added numbering of the

key conditional phrases:

[1] If in the agreement provision be made for a

method of naming or appointing an arbitrator or

arbitrators or an umpire, such method shall be

followed; but [2] if no method be provided

therein, or [3] if a method be provided and any

party thereto shall fail to avail himself of such

method, or [4] if for any other reason there shall

be a lapse in the naming of an arbitrator or ar-

bitrators or umpire, or in filling a vacancy, then

No. 13-1262 21

upon the application of either party to the con-

troversy the court shall designate and appoint

an arbitrator or arbitrators or umpire, as the

case may require, who shall act under the said

agreement with the same force and effect as if he

or they had been specifically named therein; and

unless otherwise provided in the agreement the

arbitration shall be by a single arbitrator.

9 U.S.C.A. § 5. To parse the possibilities, the first condi-

tional phrase does not apply here because the agree-

ment provided a method for naming an arbitrator, but

it cannot be followed because of the Forum’s with-

drawal from consumer arbitration. The second phrase

does not apply because a selection method was pro-

vided. The third phrase—“if a method be provided

and any party thereto shall fail to avail himself of

such method”—also does not apply. A method was

provided, but no party failed to avail itself or herself

of the method. The fourth phrase is the residual possi-

bility: “if for any other reason there shall be a lapse in

the naming of an arbitrator . . . .”

I agree with the majority that we must assume that

the parties’ arbitration agreement was drafted against

the background of the FAA, which we should also

deem incorporated into the agreement. Whether section 5

authorizes the majority’s approach depends on what

counts as a lapse. That issue has divided a few circuits,

but no circuit has gone as far as the majority goes here,

finding a correctable lapse where a drafter has at least

negligently named an arbitration forum that was never

available.

22 No. 13-1262

The majority and the cases it relies upon disagree

with the Second Circuit’s decision in In re Salomon Inc.

Shareholders’ Derivative Litigation, 68 F.3d 554 (2d Cir.

1995), a shareholder derivative action on behalf of

the corporation against several senior executives. Each

executive had signed an agreement to arbitrate any em-

ployment dispute under the rules of the New York

Stock Exchange. The district court ordered arbitration

before the NYSE, but the NYSE eventually decided to

exercise its discretion to decline to hear the arbitration.

The executives then asked the district court to use

section 5 to designate a new arbitrator.

The district court denied the request, and the Second

Circuit affirmed. In logic that fits this case to a T, the

Second Circuit explained:

[U]nder the arbitration agreements, all disputes

were to be arbitrated by the NYSE and only the

NYSE, “in accordance with the [NYSE] Constitu-

tion and rules.” The NYSE Constitution clearly

permits the NYSE to refuse the use of its facilities

for the arbitration of any particular dispute. NYSE

Const. Art. XI, § 3. When the NYSE so refuses,

there is no further promise to arbitrate in

another forum.

Salomon, 68 F.3d at 557. The Second Circuit rejected the

use of section 5 to fix a supposed “lapse in the naming

of the arbitrator.” The court read the term as meaning

a lapse in time in naming an arbitrator or filling a

vacancy on a panel of arbitrators, or some other

mechanical breakdown in selecting an arbitrator, and

No. 13-1262 23

not as a means “to circumvent the parties’ designation

of an exclusive arbitral forum.” Id. at 560–61.

The majority tries to distinguish this case from

Salomon on two grounds. Neither stands up to scrutiny.

First, the majority says that the agreements in Salomon

provided for arbitration exclusively before the NYSE

and that the parties’ choice here was not exclusive. In

fact, the arbitration agreements in both cases did not

use the word “exclusive” to designate the chosen

forum, but that was the meaning of both. That was how

the Second Circuit interpreted the agreements in

Salomon. See 68 F.3d at 558 (texts of agreements). That is

also the effect of both the contractual language and

the Forum’s Rule 1(A), as discussed above. Second, the

majority says that in Salomon, the parties agreed that

their chosen forum could decline to hear the arbitration

and decide that litigation was preferable. See 68 F.3d

at 557–58. But the same is true here. The Forum’s

Rule 48(D) says that the Forum “may decline the use

of arbitration for any dispute … that is not a proper or

legal subject matter for arbitration,” in which case the

parties are left to their “legal and other remedies.” More-

over, the Second Circuit squarely rejected the solu-

tion adopted by the majority here: arbitration according

to the chosen rules but before an arbitrator other than the

one chosen by the parties. Id. at 558. Salomon is sound,

cannot be distinguished, and calls for affirmance.2

2

In Ranzy v Tijerina, 393 Fed. Appx. 174 (5th Cir. 2010), the

Fifth Circuit applied Salomon to a case much like this one,

(continued...)

24 No. 13-1262

On the other side, the majority’s best case is the

majority opinion in Khan v. Dell, Inc., 669 F.3d 350 (3d

Cir. 2012), which also involved a consumer contract

designating the National Arbitration Forum as the ar-

bitrator. Khan is not persuasive on its own terms, and it

is easily distinguishable in any event. Khan was wrong

because it found ambiguity as to whether the key

contract phrase designated the Forum as the exclusive

arbitrator. The contract said that disputes “SHALL BE

RESOLVED EXCLUSIVELY AND FINALLY BY ARBITRA-

TION ADMINISTERED BY THE NATIONAL ARBITRA-

TION FORUM (NAF) under its Code of Procedure then

in effect . . . .” The majority’s theory was that “EXCLU-

SIVELY” could be read to modify only “BINDING ARBI-

TRATION” rather than also applying to “ADMINISTERED

BY THE NATIONAL ARBITRATION FORUM,” and that

the ambiguity should be construed in favor of arbitra-

tion. The dissent showed persuasively that the

2

(...continued)

a payday loan dispute where the contract provided for arbitra-

tion before the Forum. The Ranzy panel read contractual

language designating the Forum as being exclusive, so it

affirmed the district court’s decision not to apply section 5

to pick a new arbitrator for the parties. The Ranzy decision

was not designated as precedential, but it is persuasive, as is

the district court’s opinion in the case, Ranzy v. Extra Cash of

Texas, Inc., 2010 WL 936471 (S.D. Tex. March 11, 2010). If

anything, the non-precedential designation of Ranzy should

be read as a sign of how straightforward this problem

really should be, without resorting to the extraordinary mea-

sures our majority uses to save U.S. Cash Advance from itself.

No. 13-1262 25

majority’s strained reading was not plausible. Khan, 669

F.3d at 358 (Sloviter, J., dissenting). The dissent also

pointed out that, given the Forum’s unique history and

pro-business bias, it was not at all clear that a truly

neutral arbitrator would ever have been an acceptable

alternative for the business that drafted the contract.

But even if Khan were correct on its own terms, it

should not extend to the facts of this case. In Khan, the

parties entered into their contract for Forum arbitra-

tion back in 2004, when the Forum was actually avail-

able. See 669 F.3d at 351. The majority here breaks

new ground by extending section 5 to rescue an arbitra-

tion agreement signed after the Forum had already with-

drawn from consumer arbitration. While the Khan

panel was willing to go a long way to save Dell’s ability

to force arbitration, it did not give any signs that it

would have been willing to extend its reasoning to the

folly or worse that we see here from U.S. Cash Advance.

The arbitration agreement here was a nullity from the

very beginning. And by naming the Forum as the ar-

bitrator, U.S. Cash Advance built into the parties’ sup-

posedly contractual method for dispute resolution all

of the extra costs and delays it has imposed on Green

in this very litigation.

The other cases the majority cites for support add little

to Khan. In Reddam v. KPMG, LLP, 457 F.3d 1054 (9th

Cir. 2010), overruled on other grounds by Atlantic

National Trust LLC v. Mt. Hawley Ins. Co., 621 F.3d 931,

940 (9th Cir. 2010), the parties provided for arbitration

under NASD rules but did not actually designate the

26 No. 13-1262

NASD as the arbitrator. When the Reddam case was pre-

sented to the NASD, it declined to arbitrate because

no party to the dispute was actually a member of the

NASD. There was no indication in the Ninth Circuit’s

opinion that the parties had ever intended the NASD to

be the exclusive forum for arbitration, so the court

ordered the use of FAA section 5. Our case is readily

distinguishable because of the exclusive designation in

the Forum rules, as well as the timing issue that

makes this case unique among the circuit cases.

The Eleventh Circuit’s decision in Brown v. ITT

Consumer Financial Corp., 211 F.3d 1217 (11th Cir. 2000),

also involved a designation of a perhaps different “Na-

tional Arbitration Forum” to arbitrate employment dis-

putes. The designated “National Arbitration Forum” in

that case had apparently dissolved and thus was not

available. There was no indication of exclusivity in

the designation, and of course there was also no issue

of timing that we have here.

Thus we should follow Salomon and affirm. The

majority errs by choosing instead the less persuasive

side of a circuit split and then taking the logic of that

weaker side even farther than any circuit court has gone

to date, rescuing an arbitration agreement that was

fatally flawed from the very beginning.3

3

The majority makes perhaps its longest stretch in claiming

its decision is consistent with an implicit assumption in the

Supreme Court’s decision in CompuCredit Corp. v. Greenwood,

(continued...)

No. 13-1262 27

III. The Majority’s Broad Dictum

The majority concludes with a broad and mistaken

dictum. The introduction to the dictum is the majority’s

criticism of the non-statutory “integral” test for deciding

when to exercise section 5 power, which was used in

the very cases the majority relies upon, such as Khan

and Reddam. I agree, by the way, with the majority’s

criticism of that non-statutory test. The sounder method

is simply to examine the relevant texts to determine

whether the contractual selection of an arbitrator

was exclusive or not. Here it was. See Forum Rule 1(A).

But the majority then offers its new solution by

supposing that a contract said merely: “Any disputes

arising out of this contract will be arbitrated.” Would

that be enough to invoke section 5 to have a district

court fill in all the additional details? The majority says

yes, but has no direct case support for that answer.

3

(...continued)

132 S. Ct. 665 (2012). The Court ordered arbitration of the

parties’ dispute. The opinion said nothing about the fact that

the parties’ contract provided for arbitration by the Forum,

which had withdrawn from consumer arbitration by the time

of the decision ordering arbitration. See slip op. at 6. The

potential application of FAA section 5 was not any part of the

question presented to the Court in CompuCredit. The only

mention of the issue came in note 3 to respondents’ brief,

which advised that the lower courts had not had to decide

any section 5 issue. The Supreme Court’s silence concerning

an issue not presented to it is a very thin reed for the

majority here.

28 No. 13-1262

The limited language of section 5 and the contract-

based logic of the Supreme Court’s interpretation of the

FAA point toward no.

Before looking at the case law, consider the many

terms that are material in even a basic arbitration agree-

ment. How many arbitrators will there be? Who will

they be? How will they be chosen? What qualifications

will they have? How will they be paid, how much, and

who will pay them? What procedures will be used?

How much discovery will each party be able to inflict on

the other? Can the arbitrator try to subpoena witnesses?

Will collective actions or class arbitration be allowed?

Will any rules of evidence be used? The list could go on.

I recognize that parties can and do save time in

negotiating contracts by choosing the package deals

offered by well-established arbitration services. But if

arbitration is supposed to be a matter of contract, how

on earth is a court supposed to answer these material

questions as a matter of contract law if the parties say

merely “arbitrate?”

The best support for the majority’s dictum is Schulze

and Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 715-16

(7th Cir. 1987), in which we enforced a clause providing

only that “all disputes under this transaction shall be

arbitrated in the usual manner.” Noting that the

contract was a sale of goods between merchants, 831

F.2d at 716, we affirmed an order directing arbitration

before the American Arbitration Association and

according to its rules. At the time, the AAA and its pro-

cedures were the most common and familiar for

No. 13-1262 29

arbitration in commercial disputes between merchants.

But there was no indication that we would have been

willing to extend that logic to fill in all the arbitration

blanks in consumer contracts, where there is no reason

to expect consumers to be familiar with arbitration or

any customary terms or procedures.

The other cases cited by the majority on this point

involved stand-offs in the selection procedures for an

arbitrator, which are the target of section 5, see Bethlehem

Mines Corp. v. United Mine Workers of America, 494 F.2d 726,

730 (3d Cir. 1974); Deaton Truck Line Inc. v. Local Union 612,

314 F.2d 418, 421, 423 (5th Cir. 1962), and/or labor arbitra-

tion between unions and management where there was a

course of dealing to guide the courts in filling in the

details, see Plumbing and Pipefitting Ass’n v. Bechtel Con-

struction Co., 128 F.3d 1318, 1320–24 (9th Cir. 1997). These

cases are not instructive for consumer arbitrations.

We should not read section 5 of the FAA to allow or

require courts to decide all of the basic questions about

arbitration. The designation of an arbitration forum

“has wide-ranging substantive implications that may

affect, inter alia, the arbitrator-selection process, the law,

procedures, and rules that govern the arbitration, the

enforcement of the arbitral award, and the cost of the

arbitration.” Grant v. Magnolia Manor-Greenwood, Inc.,

678 S.E.2d 435, 439 (S.C. 2009) (affirming denial of

section 5 motion where designated forum had with-

drawn from arbitrating the parties’ type of dispute),

quoting Singleton v. Grade A Market, Inc., 607 F. Supp. 2d

333, 340 (D. Conn. 2009). The majority decision here

30 No. 13-1262

treats the parties as if they were indifferent to who

would arbitrate their disputes, so long as the arbitrator

uses the Forum’s Code of Procedure. (That view is not

realistic, though I agree with the majority’s decision

not to endorse the pro-business bias that probably moti-

vated U.S. Cash Advance’s preference for the Forum.)

We should read section 5 as the Second Circuit did in

Salomon and should affirm the district court’s order

denying the defendant’s motion to compel arbitration.

IV. Conclusion

Since the case is going back to the district court, it is

worth pointing out just how much freedom the

majority’s approach leaves the district judge in

appointing an arbitrator. The Forum’s Code of Procedure

includes some elementary requirements for neutrality,

see Rules 21 and 23, but as discussed in oral argument,

the judge will have wide discretion. The judge could

select an arbitrator, for example, who is familiar with

the practices of the payday loan industry. The judge

could also select an arbitrator who is open to considering

the use of claimant classes in arbitrations, perhaps on

the theory that a consumer who would not voluntarily

waive her rights under the Truth in Lending Act probably

should not be deemed to have implicitly waived her

right to the only procedure that could effectively enforce

those rights. See generally Oxford Health Plans LLC v.

Sutter, 133 S. Ct. 2064 (2013) (upholding class-based arbitral

award where arbitrator found that contract authorized

use of claimant class); Southern Comm. Svcs., Inc. v.

Thomas, ___ F.3d ___, 2013 WL 3481467 (11th Cir. July 12,

No. 13-1262 31

2013) (same). And the results of arbitration, of course,

are subject to only the lightest judicial review.

Having forced the case out of the federal courts and

into arbitration, U.S. Cash Advance will have to live

with its choice.

7-30-13