The answer in a nutshell:
In addition to the denial of consumers’ and employees’ rights to seek remedies in court, arbitration between two parties with unequal bargaining power is too often a discriminatory and one-sided process, benefiting the corporations mandating it.
An alternate title to this article could be: Why You Can’t File a Class Action Lawsuit. Timeshare contracts today typically contain an arbitration clause. The signer agrees not to participate in a class action, waiving their right to a jury trial. There may be an opt-out provision. Hardly anyone notices the arbitration clause, much less an opt-out clause, when on vacation, dreaming about future great vacations just purchased.
There have been extreme adverse rulings.
One family reported that they were planning to file for bankruptcy because the arbitrator ordered them to pay their $50,000 timeshare loan and an additional $60,000 for the resort’s attorneys’ fees. Arbitration is also private and binding, as opposed to a lawsuit that is publicly filed. Rather than a judge paid for by taxpayer dollars, Developers pay arbitrators $400 to $800 an hour or more. There is little to no chance of appeal. Some years back, 19 attorneys general signed a letter attempting to eliminate pre-dispute arbitration, but those efforts failed.
The KIRCHNER vs. Wyndham Vacation Resorts class action lawsuit we reviewed last week was all about arbitration:
This case is about one identical arbitration clause in Wyndham and WorldMark contracts and a single, common fraudulent omission by Wyndham and WorldMark.
The Bedgood Oral Arguments about arbitration
We reported earlier on the Bedgood vs Wyndham Vacation Resorts Florida lawsuit, one of three lawsuits in which the courts in New Jersey, South Carolina and Florida denied Wyndham’s motion to compel arbitration. Two of the lawsuits were settled.
The American Arbitration Association (AAA) had refused to arbitrate Wyndham cases saying that Wyndham did not follow their rules or policies. The Wyndham contracts stated that the AAA will appoint an arbitrator. When the AAA refused to arbitrate, the Bedgoods and other plaintiffs filed a class action lawsuit. Wyndham filed a motion asking the courts to appoint a Special Arbitrator. When the court denied Wyndham’s motion, they appealed.
We felt readers with the stamina to plow through 19 pages of argument over arbitration’s rules and/or policies would appreciate hearing the whole nine yards. As I listened to the arguments, what came to mind was what a friend of mine said years ago when I commented on his PhD. He joked, “A PhD is someone who learns more and more about less and less.”
Before we begin our hour in court, it should be noted that Westgate Resorts and other developers are also vigorously arguing in favour of arbitration. At stake is nothing less than our national security and military readiness. A service member can lose their security clearance and be involuntarily separated from service if defaulting on a loan. The Military Lending Act (MLA) prohibits arbitration.
Westgate was sued on February 2, 2022, accused of violating the MLA. Effective February 1, 2022, in order for existing owners to access a “WOW” (World of Westgate) benefits page, Westgate requires the owner to agree to arbitration. Since residential mortgages are exempt from the MLA, the debate is about whether a timeshare stay is a residential or transient stay. As the judge explained in those oral arguments, “When I check out of a timeshare, I can’t leave my toothbrush and underwear.” That case is also on appeal.
Bedgood vs Wyndham Oral Arguments at the Eleventh Circuit Court in Atlanta, GA,
Case Number: 22-11504, April 21, 2023
Introduction by the court: Stay of our panel here sitting in Atlanta. Judge Newsom and I have had a wonderful time here as usual, and the weather has cooperated as well. We’re very thankful to have with us Judge Steven Grimberg who sits only a couple blocks from here in the Northern District of Georgia and is a proud graduate of Emery Law School. He was with us on Wednesday and we’re glad to have him back today and we’re very grateful for his assistance. We have two cases to be orally argued this morning. Before we start, you know the lighting system, When the yellow light goes on that means your time is starting to draw to a close so begin to wrap up. If we take you beyond the red light, and we’ve done that a lot this week, don’t worry about it, just keep going.
Our first case this week is No. 22-11504 Charles Bedgood v Wyndham Vacation Resorts et al.
Mr. Sager (counsel for defendant): Good morning Your Honors, and may I please the court. This is a somewhat unusual situation or setting for arbitration in that both parties, plaintiffs and the defendants, agreed that they had arbitrated and attempted to submit their case to arbitration. What’s unusual about this case is that it was not either of the parties that frustrated the effort. It was that the AAA decided to reject the arbitration and the AAA decided not to elaborate on the reasons why it rejected the arbitration.
The court: But it did say, right, that it was rejecting arbitration because your client was in violation of the rules, right?
Sager: It said that we were not in compliance with their policies, but it did not articulate which policies those were, Judge Newsom. And while we can assume, or can extrapolate from other cases, that we think we know, the arbitration administrator never elaborated on what those reasons were in these cases, and we don’t know as we sit here today. Anything we surmise is just that, an assumption.
The court: There are some cases from other jurisdictions which say that failure to pay the fees of the arbitral source can be a basis for rejecting an arbitration claim, right?
Sager: Absolutely, and we don’t quarrel with those cases.
The court: So how do we set aside the district court’s order without knowing the reason for your client’s alleged violation of the rules?
Sager: Well Judge, I think we can start by saying the district court’s opinion should be set aside because there was no finding as to what the reasons were.
The court: Did you put forth a reason?
Sager: We don’t know the reasons because –
The court: You haven’t asked the AAA?
Sager: The AAA – no I have not asked the –
The court: Not you, but your client
Sager: No, I do not believe so and the arbitration was rejected, and the lawsuit was filed.
The court: Stepping back for a second and looking at this from, you know, a high altitude. It strains common sense. And this has nothing to do with your legal position here today. It strains common sense to think that an entity like Wyndham, or any other entity, which the AAA thinks is in violation of some policy or rule, doesn’t engage in communication with the AAA to figure out what the alleged problem is to see if it can be solved or to see if the AAA made a mistake or the like – that just strains common sense.
Sager: Well, I can say Your Honor, that there is no evidence whatsoever that it has anything to do with administrative matters such as fees. What we have from other cases that the plaintiff has submitted is that there is a reference to the form selection clause, and we would say that the AAA’s finding in those other cases was incorrect and there was a reference to the limitation of liability provision, but there’s no issue that I’m aware of, and there’s certainly no issue in the record as to fees. And I think that distinction is critical because we expect an arbitration administrator to make determinations about administration. If someone does not pay fees or frustrates the arbitration by not complying administratively, it makes sense to have a gatekeeper –
The court: Why, isn’t that exactly what this case is? I mean, I don’t understand how the fees issue is any different. I mean, from my perspective, and I want you to try to explain to me why I’m wrong about this, it seems to me that the AAA has made a determination that your client did frustrate the arbitral process by refusing to comply with policies and the rules, say that, uh, you know, consideration of whether there has been material compliance with the due process standards, determinations of whether to administer arbitrations pursuant to the clause, is an administrative determination for the AAA under the rules you bargained for. That you demanded, frankly. That is what the commercial arbitration rules themselves say.
Sager: Case, your honor, the arbitration provision expressly states that if there is a conflict between the arbitration provision and the consumer rules, the party’s contract controls and that is a distinguishing factor. So, the parties did not, in this case, agree that whatever the AAA says, goes. What the parties said was, we will be bound by the consumer rules unless those consumer rules stand at odds with what the parties have in the agreement. And that is precisely what we have. There’s another important distinction –
The court: So, when you say that’s precisely what we have what’s the “that” in that sentence?
Sager: The dispute before the AAA that the AAA is raising is that we are suggesting an application of law that the AAA does not agree with. It has nothing whatsoever to do with whether we are participating in the arbitration. The AAA has made a judgment that their view of the law of the state of Florida, or the FAA, should be substituted for what the actual law is.
The court: Just so I’m tracking, when you say the law, the law of the state of Florida, the law of the FAA, what are we talking about? I thought we were really talking about – whether or not you were in compliance with AAA policies I thought they found you, for what whatever reason, in violation of their policies, not the law, but their policies and thereby said were not doing this.
Sager: Again, we don’t know, but let’s assume from reference to other cases that one of the policies that they think that we are in violation of, is that our limitation of liability provision conflicts with Principal 14 of the principles that have been articulated by the American Arbitration Association. I will assume that for the sake of argument today –
The court: What’s Principle 14?
Sager: 14 refers to available remedies and states the arbitrator should be empowered to grant whatever relief would be available in court under law, or in equity. And in another case that we have no record of here, but the plaintiff has submitted, we know that the AAA said one of the principles that were violated was Principle 14. And what I’m submitting to you today, is that our agreement, our limitation of liability provision, stands or falls based on reference to the law, not based on what the AAA views the law should be. The parties agreed that an arbitrator would decide that issue, subject to the law. The contract specifies that. And what the AAA is doing, and why this case is so important, and its ramifications are so far-reaching, is the AAA says their view of the law should substitute for what the law actually is and that’s exactly –
The court: But the AAA is doing no such thing. It’s a court that’s going to do that. The AAA is just saying we’re not arbitrating your dispute. It’s not trying to bind you in any way. It hasn’t submitted an amicus brief here saying you know what we say goes and you’re bound by what we say. They’re running an administrative shop that provides a service and they think you can’t play in the playground because you violated a rule or policy. They’re not, they’re not trying to do anything independently. The question, I think you’re right, the question is a legal one. But the AAA is not trying to do anything in this case. They just refuse to arbitrate.
Sager: Well, we’re actually not sure if they refuse, because there are several submissions that show that, where ordered, where a court has issued an order under Section 4 of the FAA, that the AAA will take a case, including the case against Wyndham.
The court: Let me ask you one question and then I’ll be quiet. Arbitration, initially, is a matter of contract. Right?
The court: You and the timeshare plaintiffs, bargain for the AAA rules, and one of the AAA rules in the consumer arbitration rules, I think it’s rule 12 says, if the AAA declines to administer a case due to the business non-compliance with the notification requirements set out in this rule, the parties may choose to submit their dispute to the appropriate court. Why isn’t that the end of the case?
Sager: Because it allows the AAA, administratively, to be the gatekeeper of whether a case is arbitrable or not. It reverses all of the authority on who gets to decide that the threshold issue, or how the issue is decided. And if that were the law anytime and for any reason the AAA says, we don’t want to hear it, a party would be in litigation. And what –
The court: Not if you have a provision in the contract that says, should the entity we’ve chosen refuse to arbitrate, a substitute arbitrator shall be appointed. You don’t have that clause in your agreement.
Sager: And respectfully, your honor, I don’t think we need it because we have Section 5 of the AAA which allows and provides for the appointment of a substitute arbitrator because I take Your Honor’s point –
The court: But just so we’re clear, only when, as one threshold condition, the arbitral forum is unavailable and then the question becomes whether you can unilaterally render the forum unavailable by refusing to comply with its rules.
Sager: We don’t know, I don’t know, as I stand here before you, whether the arbitral forum is available or not, because the AAA has not said. It is only said we reject the arbitration, so we have two options –
The court: With respect to these plaintiffs, and any other plaintiffs engaged in business with Wyndham, because Wyndham doesn’t comply with our rules, Correct?
Sager: Correct. And what we are saying is, if the arbitrable forum of the AAA is unavailable then –
The court: By your unilateral action
Sager: But then, and I have to pause there. Absolutely not. We’ve taken no action.
The court: Well, you’ve – the AAA has said that you have refused to comply with its rules. It hasn’t specified the reasons, but it has made a determination that you’re out of compliance and so we’re not adjudicating your dispute.
Sager: I agree with your honor, that that’s what they have said, but it’s from my perspective somewhat circular. If all that AAA needs to do is say we’re not taking it. Then –
The court: Because? Say we’re not taking it – they said we’re not taking it because Wyndham is out of compliance with our rules. Correct?
Sager: Correct. With our policies. Now, if those policies were fees and they had articulated that, we would be talking about one very long line of cases, and I would have no quarrel with the notion that we failed to participate by refusing to pay fees. That is not the fact.
The court: Why are fees so special? Just so I’m clear about this.
Sager: The courts, over a period of time, have interpreted fees as a gatekeeper function. If you refuse to participate by (not) paying fees the courts have said uniformly, in all the cases, that the plaintiff relies on that, that is disqualifying. That you can’t simultaneously say you’re availing yourself of arbitration but refuse to perform administrative tasks relevant to the arbitration
The court: I will tell you, just speaking only for myself, I do not understand this sort of bright line that you’re trying to draw between fees and all other policies, rules, whatever we want to call them. That you can sort of, with impunity, violate all of those, but if you cross the fees line that is somehow special. I just don’t really understand that at all.
Sager: Your honor. To be clear we don’t think we can violate anything. An arbitrator, or in certain circumstances, a court can make a determination. The problem, in this case, is no one has made that determination. That issue of the policies, and not the rogue policy, what I would submit as a rogue policy of fees, the policies of limitation of liability or form selection. No arbitrator, no judge has addressed that. All we have is a letter from the AAA, and if AAA has that authority, then we’re going to be in this circle in any number of cases going on and on and on –
The court: But you don’t deny, right, that the court – I recognize that you dispute that the court here deferred to the AAA’s determination that you were out of compliance with the policies. You don’t like that. You either think that either an arbitrator or the court de novo, so to speak, should have made that determination. One of those two things. But you don’t deny that for what you would consider to be a core administrative matter, fees or otherwise, that a court could defer to the AAA’s determination with respect that, if the AAA says, I think you just said this, but they haven’t paid the fees so were not doing this. Then a court could say we will take on face value to the AAA’s determination that you have not paid the fees and were deferring to that determination, right?
Sager: And that is the law of this circuit and has been for some time, whether it be the Freeman case or is recognized in others, in Brown. But in Casper’s, the court articulated a distinction. This court articulated a distinction.
The court: Just to be fair, in an unpublished opinion which binds no one, right?
Sager: But we use what we can, and the distinction is made in there. But here, if there was a record, any record of fees, we would be talking about that and maybe we would quarrel with the AAA and say well, we wrote the check and here’s the cancelled check and you did get it. We would have that discussion, but that’s not on the table because the AAA never said – that there’s been, there’s been no illumination as to what the reason is from the AAA. We can only surmise, and again Your Honor, because I appreciate the frustration with the tension between what’s the difference between a fee and a policy, one is empirical, one is a matter of judicial application, or an arbitrator application. When one goes to the AAA, they’re agreeing to have a neutral, an arbitrator, not an administrator decide these questions.
The court: Decide the merits of the dispute, right? But there is a distinction you’ll recognize between you know, sort of merits issues and administrative issues, and you’re, I think just asking me to take as gospel the fact that fees are somehow permissibly administrative, and the other things, whether it’s choice of forum, damages, you know, sort of, limitations, whatever those are, not administrative. Those somehow run to the merits, the thing that the arbitrator would do.
Sager: Certainly, I am not asking you to take my word for it. But the law in this circuit and others is clear on the point. That courts do treat the fee issue differently, and each and every case that the plaintiff argues from is about fees –
The court: So are there cases, I take your point, that our case law says fees are administrative. If you will allow me to just sort of, put things in buckets. There’s the administrative bucket, the merits bucket, the fees are administrative but do our cases say fees, and only fees, are administrative?
Sager: The cases have not articulated, from my reading of them, in any sort of routine fashion on any other basis. For instance, there is a case, and I apologize, I can’t remember the site. It’s in the papers, where one of their, one of the parties of the arbitration refused to get back to the AAA. They refused to participate; it was empirical. They didn’t do what they were supposed to do. Now the difference, and here’s where we are not suggesting for a moment, is that our view of what a limitation of liability provision should be is a matter for us to decide. And we are simultaneously not saying that it’s a matter for the AAA as an administrator to decide. All we are suggesting is that it is absolutely not for the AAA to rewrite the law and say, here’s what we’re gonna do – if you don’t comply with the law as we want it – not as it is – we will not recognize you as a participant in arbitration. Now that’s fine, the AAA, you are exactly right there. The AAA can make its own policies as to whether it will accept or not accept arbitration. But what shouldn’t happen, is that the AAA’s exercise of policy judgments becomes the gatekeeper for whether cases are arbitrable or not. That’s what we object to.
The court: So, can I ask you a question? Let’s assume the district court appoints a substitute arbitrator. Right? And Section 5 says you and that arbitrator proceed under that agreement. Right? The agreement sets the AAA rules. The arbitrator decides you violated the AAA rules. What then?
Sager: Two things. I would absolutely have a much harder argument. Because I would have to seek to reverse the arbitrator and say the arbitrator has done something that we all know to be much higher …
Judge Byron: No, and refuses to arbitrate.
Sager: Oh I –
The court: You’ve told me you’ve appointed me a substitute arbitrator. You’ve told me to proceed under the agreement. The agreement tells me to proceed under the AAA rules, including the consumer arbitration rules. I find that you violated the AAA consumer rules. I’m not arbitrating.
Sager: I would have a right of appeal to that and I would be able to argue to a court –
The court: I know, of course, you would appeal. My question is, what do we do?
Sager: I would come in –
The court: With arbitrator number three
Sager: Well, if a court determined that the arbitrator had abused authority or something –
The court: No, in my hypothetical, the arbitrator gets it exactly right. The arbitrator makes a finding that you violated, you Wyndham violated some integral policy of the consumer rules, and as a result, he refuses to arbitrate.
Sager: If we assume that –
The court: I’m done.
Sager: I apologize. If we assume he’s right, then we lose. But in that instance –
The court: So, if Wyndham is right now, you lose? Same thing.
Sager: Uh I’m not following why –
The court: If Wyndham is right now, about your having violated a rule, you lose.
Court Reporter: (If the plaintiff is right now, about your having violated a rule, you lose.)
Clerk: Not Wyndham, the plaintiff
The court: I’m sorry. If the AAA is correct, that you violated a rule, you lose now. Because that’s the exact same scenario as my hypothetical with the substitute arbitrator.
Sager: If an arbitrator determines that we violated a rule and that, therefore, we are not eligible to be before the AAA, then we are bound by that determination. But there’s a very critical distinction.
The court: So, if an arbitrator gets appointed now and says we agree with the AAA that you violated a rule and we shouldn’t arbitrate, you’re done?
Sager: If the arbitrator makes that judgement based on submissions.
The court: A court is now bound and defers to that decision.
Sager: Subject only to my appellate rights. Because I’ve got an arbitrator. That’s what I bargained for. But the – I would just point out the distinction, that in this contract, the arbitrator – the AAA’s rules do not apply. They apply only if they are not in conflict with the arbitrable agreement or the arbitration agreement. So, it is not the case that the parties in this agreement. It’s not disputed.
The court: I don’t understand what the conflict means.
Sager: The conflict means –
The court: Because a conflict makes a rule inapplicable.
Sager: Not at all. What I do is, I say that our agreement is subject to the law. And if we put something in that agreement that is compliant with the law, it is not for the AAA, administratively, to say we disagree with the law. Irrespective of what you said or did – Wyndham or any other participant. We disagree with that law. We are going to exercise our own judgement and supplant a court’s judgement, or a legislature’s judgement, with our own. That’s what we suggest they can’t do. And the distinction here – and the cases make the distinction important – is, if what we said is, AAA, whatever you do we’re on board. We subscribe to your rules, lock, step, and barrel. We would have a much different, and harder argument. But we expressly didn’t say that. In the arbitration provision the parties agreed, and plaintiffs don’t contest, that the AAA rules do not apply if they’re inconsistent. And again, what we’re talking about here is not us doing something unlawful.
The court: What’s inconsistent with a finding that you violated an administrative policy or rule and that the AAA is not going to arbitrate? What’s inconsistent between that and your arbitration agreement?
Sager: The inconsistency is that the AAA is administratively making the judgement without any findings, without any explanation –
The court: Findings. But we don’t know that.
Sager: But I think for purposes of us being here today –
The court: And you have told me that Wyndham hasn’t asked. They don’t really care what the reason is.
Sager: We absolutely care but we’ve simultaneously –
The court: Haven’t asked.
Sager: We – It has been a matter of record that in other cases where they’ve been ordered –
The court: I’m not talking about other cases.
Sager: Yeah. You are correct, that I can’t tell you as of right now, um –
The court: That doesn’t make any sense to me whatsoever.
The court: Yeah, so again now we’re back to you unilaterally sabotaging the process. Now it’s by simply refusing to ask what the reasons are?
Sager: No, I want to be really clear on this. We’re not sabotaging a process. We are ready, willing, and able to participate in arbitration. We have done nothing other than to, according to an administrator, fail to comply with policies to frustrate arbitration. We have done nothing affirmatively. We are ready, willing, and able. As is plaintiff. Only the AAA is unwilling. And the CPO case makes it very clear that that’s not good enough. The AAA doesn’t enjoy that. Now, if the district judge had appointed a substitute arbitrator, we would be back in arbitration where everybody agrees we should be. Or, if the district judge ordered the AAA, in the alternative, to take it and the AAA said you know what, we now have an order, which we know they sometimes do, we will take it. We’d all be back in arbitration where we all agree we should be. That’s what’s unique. Why are we here? We’re here because the AAA, and only the AAA, decided we should be here.
The court: Except that the AAA gave a reason. The AAA didn’t say, you know, we’ve cast lots, or we flipped a coin. We just decided arbitrarily that were not going to do it. It said we’re not going to do it because Wyndham is out of compliance with our policies.
Sager: And I agree with you that they made that statement. But the law in this circuit, and throughout the country, says that which policies are at issue, matters. Now there are arguments to be made and analysis to be done. but the courts uniformly say that what policy is relevant –
The court: Is this the fees versus the universe line that your drawing, sort of?
Sager: It’s the administrative issue versus the exercise of judgment. Of legal judgment and supplanting the will of courts and legislatures because the AAA simply says we don’t like it
The court: So, let me ask you this. So, I think I’m beginning g to understand your position, is that things that are empirical are properly administered. Things that aren’t empirical, that require some exercise of legal judgment, are not properly administered. Is that right roughly?
Sager: Roughly, and I think that what it goes to, is interpretation of the provision of a contract. When parties agree to arbitrate, what they’re saying is, we want an arbitrator. Or if they don’t delegate a judge with the assistance of an arbitrator, to tell us what our contract means and entitles us to.
The court: So just so I’m clear, and I recognize that this may not be on the record in this case, but the one noncompliance that has been alleged in other cases is that you insist on venue in Orange County, California, correct?
The court: And that the AAA rules require alternative venues, is that right?
The court: Does that require the exercise of legal judgement? Whether something is or is not in Orange County, California? That sounds pretty empirical to me.
Sager: This is for two reasons. The first reason is, if we are permitted under state law to designate an exclusive forum, then I would submit to you that the AAA cannot use its judgment, sound or otherwise, to overrule that. But here, that’s not what the agreement says. The agreement actually says that the arbitration shall be held in Orange County, unless the parties agree to another location, or the arbitrator decides to hold a telephonic hearing, or the arbitrator decides – and I just input those words, the arbitrator decides, I don’t want the record to be unclear – or the arbitrator decides to designate another location reasonably convenient for the parties. The agreement does not say it has to be in Florida and that’s exactly why this is so problematic. If we had a judge or an arbitrator looking at the agreement and applying the law, the arbitrator or the judge would have two options. To say that it’s valid and enforceable as written, or not. But what we have the AAA doing here, is saying I’m only gonna read the first sentence, if in fact, this is what they did – again we don’t know. I’m gonna read the first clause in that sentence and I’m gonna stop reading. And because I stop reading, I’m going to foist on the courts a dispute that the parties agreed should be arbitrated.
The court: Let me ask you one final question and then we’ve taken you way over your time. And we’ll give you all of your rebuttal time. You concede, I think, that fees are a different animal, right?
Sager: I do
The court: Okay. So let me ask you one other possible – if we write in your favor in this case, we have to announce a principle and figure out how it’s going to play out, not only in this case but in cases going forward. So let me ask you a question, to see the limits of the concession. A set of arbitration rules, maybe not the AAA, but whatever arbitration rules the parties bargain for, say each party will suggest an arbitrator from our pool of arbitrators. And then the body, whatever body it is, will choose one of the two. The business in my hypothetical refuses to suggest an arbitrator and the body says you’re not playing by the rules and were not arbitrating any more of your cases. Is that like fees or is that not like fees?
Sager: I think it’s more like fees. Um, but I think the arbitration administrator would have two options. They would say, I only have one choice because you didn’t give me one – I’m appointing the one choice. Or I think the arbitration administrator could fairly say you are not participating. You are not involving yourself in a process that you profess to avail yourself of in a contract and therefore we are unwilling to continue the arbitration. It’s unavailable to you. I think either would be acceptable and yes, I do think it’s more like fees –
The court: So more like fees.
Sager: More like fees your honor because it reflects a lack of participation as opposed to a difference in legal judgement and what is acceptable and not.
The court: One more question before you sit down. The first remedy you’ve requested is the position that both sides are available, and so AAA should be compelled to arbitrate – notwithstanding their administrative denial. I understand from Casper’s and other cases, is that AAA’s policy is that they would comply with an order, but AAA is not a party in this case, they have not been brought into this case, so what jurisdictionally – how can a court compel AAA to hear this case if they don’t want to?
Sager: I don’t think you can. I think the answer is this court could exercise its digression in the alternative, or the district court could exercise the alternative and say we believe the case should be arbitrated and we’re ordering it to proceed in the arbitration. And if the AAA is unwilling to take the case, then we will appoint a substitute arbitrator. And the reason for the spilled ink that was referenced in the decisions below, is we still don’t know whether the AAA is available or not. To the point your honor made earlier, the AAA absolutely has the digression to say we won’t take it. But they haven’t said that, and they’ve indicated the opposite.
The court: Alright, thank you very much.
Sager: Thank you your honors
Prossnitz (Counsel for Plaintiffs): Good morning Your Honors, Howard Prossnitz for plaintiffs’ appellees. If I was a wise man, I would probably say nothing, but as a proud graduate of Stanford Law School, I feel I should talk. One other personal note. My daughter was actually in this court a couple of months ago on her first argument and this could be my last, so it’s a pleasure to be here. So, let me go directly to some of the points in counsel’s argument. This idea that we do not know why the AAA did what it did is not correct. In Reynolds’s opinion, which is part of the record, at page –
The court: Here is part of the issue. We can judicially notice other opinions for what they ultimately decide, but our law is that we can’t judicially notice facts determined in those proceedings, and that causes all sorts of due process issues. So, I can, we, can take judicial notice of the fact that a district court in North Carolina refused to arbitrate a Wyndham case. Absolutely. But if that court took evidence and makes factual findings about why Wyndham violated a AAA policy or whatever. We don’t adjudicate that as given because it creates all sorts of problems. In this case, it’s helpful to you, but in the future case, it could be really detrimental to you.
Prossnitz: Your Honor. This was not any type of fact-finding by the Reynolds court. This was the Reynolds court quoting an admission from a Wyndham brief where the Wyndham brief admitted – alright then I’ll forget about it. I’ll forget about that one your honor.
The court: I don’t want to fight with you, I just want to explain what the problem is, what’s good for the goose is good for the gander and picking and choosing findings from courts in other places without the parties who are here, having been there, creates all sorts of issues.
Prossnitz: Alright, I understand, so we’ll just leave it that Wyndham apparently has not asked and we don’t know. Other than the letter itself from the AAA which says, do not comply with –
The court: And this letter, that’s all we have, right?
Prossnitz: Correct, correct.
The court: So why is that enough, if we don’t have the – we do have a reason – like Judge Newsome said. We do have a reason. We don’t have the sub-reason, like you violated this policy.
Prossnitz: Because we don’t need it. It’s administrative. It’s an administrative decision. The administrative rules were incorporated into this agreement. The Freeman case I think is very important. We didn’t get to develop that enough in our brief. They characterize the Freeman case just as a fees case. It was not just a fees case. It was this alleged inconsistency that the company was making the same type of argument that Wyndham is making on an alleged inconsistency, where the company had an arbitration agreement provided for sharing of costs and the consumer rules of GM said the consumer shall only pay up to $250. And the company said that’s inconsistent, so we refuse, we refuse to go ahead. We’re not going to pay the fee because we will not waive our – we will not waive that provision and the trial court used the word “default.” And this court, this court also agreed that that was a type of default. So, we’re not – I would just urge you to take another look at the Freeman case because it’s not simply a fees case. The other – I guess –
The court: Here you have, your agreement has a clear and unmistakable delegation provision as to the arbitrability of the dispute.
The court: So how could the district court have decided default given, given that the arbitrability of it should be decided by an arbitrator?
Prossnitz: The question goes to the meaning of the word default. The district court felt that failure to follow rules is a default, and that actually was the same language as Freeman. Failure to follow rules is a default. But the important point here is there was no threshold issue of arbitrability. Both sides agreed to arbitrate. All we’re talking about is administrative rules. As Judge Jordan correctly pointed out, if Wyndham thinks these rules are bad, they’re free to designate another forum. If they want a substitute arbitrator, they’re free to designate another place to go and I think there’s an important admission in Wyndham’s reply brief where they say that the AAA is free to decide which cases it wants to hear, but it is not free to void an arbitration agreement. We agree –
The court: But the clause also says that in the event of any conflict between the AAA Rules and this agreement, the provisions of this agreement shall be controlling. They agreed to that, and your clients agreed to that.
Prossnitz: We don’t see that as an inconsistency. An inconsistency would be if the Wyndham arbitration agreement said AAA has to take this case no matter what. That would be an inconsistency. But here Wyndham incorporates those very administrative rules into its agreement. So –
The court: Without being in conflict.
Prossnitz: Well, I guess we just – we just don’t see the conflict. I mean –
The court: If the AAA decided that it wasn’t going to take the arbitration of these three timeshare plaintiffs because it didn’t have the capacity. Like, listen, we’re swamped, we just can’t do this. And we can’t do it for the foreseeable future. It will take us five years to catch up with the backlog. We can’t do it, we refuse, hands off. Where are you?
Prossnitz: If they can’t do it?
The court: They say they’re not doing it because right now, administratively, they don’t have the capacity to do it. They’re just overwhelmed with cases. They’ve lost arbitrators, they’ve lost employees. We just can’t do it. It would take us five years to get to your case so we’re stepping out.
Prossnitz: I guess I would say the problem is the way Wyndham drafted its clause. You pick the AAA. You made absolutely no provision for a substitute. You could have designated another forum. You should re-write your clause.
The court: In that scenario, and I’m not sure that I agree with that, I’m sympathetic to your general position, but I’m not sure that I agree with that. Because in that case, it’s very hard to argue that Wyndham or the timeshare plaintiffs are at any default, or have done anything wrong, or anything inconsistent with arbitration. They’re trying to get there but the body says eh, we just can’t do it for you, sorry.
Prossnitz: Let me counter with a hypothetical of my own which is –
The court: I’ll do my best to answer it.
Prossnitz: Let’s suppose that Wyndham had drafted this clause just like Casper’s and they said we shall – that the parties shall agree on a substitute if the AAA declines or decides not to hear it, okay? AAA decides not to hear it. We are now in front of a substitute. Could I go in front of the substitute and argue that AAA has decided this is not arbitrable, and that AAA has voided this clause? Absolutely not. So, there’s been no substantiated decision on arbitrability. Gateway issues of arbitrability relate to whether the agreement is valid, and whether its enforceable. There’s been none of that in this case, and –
The court: But in my hypothetical doesn’t Section 5 easily kick in? And I’m quoting “If for any other reason there shall be a lapse in the naming of an arbitrator… then upon the application of either party… the court shall designate an appoint an arbitrator… who shall act under the agreement with the same force and effect as if he had been specifically named.”
Prossnitz: You’re absolutely right, I stand corrected. You’re absolutely right. And in that case AAA, a substitute would be okay. But here both the district court and the magistrate agreed the AAA was available.
The court: May I ask you to address Wyndham’s argument with respect to a couple, or a few of the plaintiffs who didn’t even try to arbitrate. Why didn’t they, within the meaning of, Section 4 I think it is, fail or refuse to arbitrate rendering Wyndham agreed with respect to them?
Prossnitz: Well, they’ve seen this history and they felt it was futile. I mean if they could go back and make the demands, but based on what’s happened again, and again, and again, their demands – their arbitrations would not be administered.
The court: Alright, so here’s, here’s the issue I have with that aspect of the case. We don’t know the specifics – a specific reason for an alleged violation, right?
The court: We know that they violated a policy rule according to AAA, but we don’t know which one.
The court: Those violations, assuming it is a violation, those violations of policies or rules can be corrected. Sometimes they can’t. Sometimes it’s just intransigence on the part of an entity. So, if it’s the type – and we don’t have anything in the record to tell us there’s some specific reason. Why are we to presume one way or another that this violation can’t be corrected going forward? Maybe Wyndham has seen the light and said, oh my God, we better correct this because if not, we’re going to have all these cases going into federal district court or state court. And we don’t want that, so let’s make a corporate decision. Let’s fix the problem. Let’s tell AAA we’ll do good and now AAA will take our cases.
Prossnitz: That would be fine with me your honor.
The court: Okay. If that’s the case, then why – and we don’t know the reason. And we don’t know what Wyndham’s reaction is to the finding by the AAA. Why shouldn’t the other timeshare plaintiffs go to the AAA and say we have a matter for you. Have them say nope, still a violation. Still not doing it.
Prossnitz: My guess, based on history, is that they’re going to be – you know I would not be upset if that were to happen because that would either mean we’d be back – either the same thing would happen again, or Wyndham would fix the clause. So, that would not upset me.
The court: Can I follow up on Judge Newsome’s question? As to the plaintiffs who did not make the request to arbitrate. Did AAA ever deny an arbitration request against World Mark?
Prossnitz: Yes. It’s in the record at page ID 299. And also, WorldMark is not on the approved list of companies for whom AAA will administer cases. I think our bottom-line argument got through, which was, if you want to arbitrate you should be able to arbitrate. You shouldn’t also have to sue in federal court. That’s our one-sentence synopsis. And Mr Bedgood is here in court. I listened to a panel with Judge Newsome saying sometimes we forget about real people. Well, there are real people in this case.
The court: One more question for you before you sit down. One of the arguments that Wyndham makes is that an “un-arbitrator” whomever he or she is, or whoever they are, has to decide whether or not Wyndham violated a AAA policy. That’s one of the arguments, so if you could respond to that, please.
Prossnitz: Well, it goes back to the fact that this is an administrative role. Wyndham agrees it adopted the administrative rules. It agreed – you read the administrative rules during Mr. Sager’s argument – Wyndham agreed that the AAA would administer according to its administrative rules. So, there was no “policy decision.” I mean, in essence, what they’re asking you to do, is they’re asking you to re-write the AAA rules by saying these are somehow void against public policy – I mean that’s kind of what it comes down to. They don’t like the AAA rules. They think they’re void against public policy, but this is not the –
The court: It’s up to an arbitrator or a judge to make that decision.
Prossnitz: Right, but I guess it goes back to saying this was administrative – this was not. This was just an administrative decision in our view.
The court: Can I ask one quasi-related question? Another argument that Wyndham makes, related, is that our precedent makes arbitrability a question for an arbitrator, and not a court, right? Let alone an administrator. And so, what about that? Our precedent. In particular, this case, the name of which is now escaping me. Our precedent ADEX makes the question of arbitrability a question for an arbitrator and not a court.
Prossnitz: Adex was in a different posture. ADEX started in court. The district court, in that case, did make a substantive ruling on arbitrability based I believe on the Dodd Frank Act. So, there was a fundamental issue of arbitrability in that case that got decided by the district court rather than the arbitrator. Our response is both sides agreed to arbitrate. Our client did not contest arbitrability. So, there was no similar threshold decision about whether the – whether the underlying matter was arbitrable or not.
The court: That, I think, is your strongest response to the question which is, this is not an arbitrability issue. Everybody agrees that this matter is arbitrable.
The court: The question is, what happens as a result of Wyndham’s purported violation of a AAA rule or policy? But everybody agrees you’re not fighting the general notion that your dispute is arbitrable. And neither is Wyndham.
Prossnitz: We’re for arbitration.
The court: Alright
Prossnitz: There’s an adage, quit while you’re ahead or at least haven’t dug yourself in the hole.
The court: Or quit when your time is up.
Prossnitz: Thank you.
The court: Thank you.
Sager: Your honors. First, I would just like to address the issue that you raised, Judge Newsome and Judge Grimberg, regarding the five of eight plaintiffs who did not pursue a remedy, or did not pursue arbitration. I’m not aware, and I very well may be corrected, I’m not aware of any record that arbitration involving WorldMark has been brought or rejected by the AAA. And I have no basis to opine if that has happened on what basis. There’s no document I’ve seen, and if I have it escaped me. But I’m not aware of that. And the issue actually matters. Because what the request of the plaintiff is, is tantamount to saying that any individual who is subject to an arbitration agreement, that is substantively identical to the one at issue here, whether with Wyndham or not, is from this point forward not required to go to the AAA. From this point forward can simply file in federal court. And I don’t think that’s a tenable or legally justifiable position for the plaintiffs to take. Now, I’m not – my head is not in the sand as to the issue Judge Jordan mentioned that we can all read what has happened in other opinions, and we can be informed by it. But I will finish this point the way I began today. We still don’t know what those reasons are and whether those reasons are consistent. We don’t know whether Wyndham has changed. We don’t know whether AAA has changed.
The court: Can I ask you a question? Do you think that – we talked about fees, and I think you’ve agreed that fees are a different animal. Failure to pay fees are a different animal. If a court can declare a party in default for failure to pay fees, why can’t they declare a party, in the right case, in default for violating some other provision?
Sager: The structure of review of arbitration provisions, particularly those that delegate decisions of arbitrability to the arbitrator, have external factors external to the arbitration and internal. And the answer to Your Honor’s question is that in this instance the district judge addressed the issue was internal to the working of the arbitration provision. Not external in the capacity of unconscionability. So, the well-worn standard on this –
The court: But the failure to pay fees is not unconscionable. If you fail to pay your own fees that’s not unconscionable. That’s just a failure to comply.
Sager: I agree with your honor but what a party cannot do is simultaneously say that it wants to avail itself of a process and refuse to participate in the process. That is, to me, legally and factually untenable.
The court: Right. My question to you is, if we’re, that small bucket according to you of fees and maybe refusal to suggest an arbitrator, right? Does a district court get to make that call?
Sager: A district court, in that circumstance, has made that call and the answer is yes, um –
The court: So why can’t it make other calls about defaults? Alleged defaults
Sager: Well, the district court would go through, I expect, the same analysis to decide whether the issue that’s before it has been properly delegated to an arbitrator or not. If the district court goes through that analysis and determines after analyzing it, that it has the legal authority under the FAA to make the determination then the district judge can do that. Here, –
The court: Why is this dispute about arbitrability in the large sense? Everybody agrees that the matter should be taken to arbitration. There’s no dispute at the initial threshold stage about whether you go to arbitration or whether you’re properly in a state court or a federal court. The dispute is about what happens when AAA makes this determination administratively.
Sager: I’m glad you asked that question because this whole process would have been averted had the plaintiff simply said to the AAA, no, no, no, we got your letter. This is what we want and if you won’t do it, Wyndham, let’s talk about a substitute arbitrator. And the plaintiff easily could have – and I don’t mean to say this is one-sided – you raised a fair point about what did we do, and everybody shares in the responsibility. But this didn’t need to… the AAA’s rejection of the arbitration didn’t need to result in immediate federal court litigation.
The court: There might be. Presumably, you wrote the agreement, but they agreed to the agreement. And maybe they thought the AAA was the greatest arbitral forum in the history of humanity, and commercial rules are awesome and that’s what they wanted. That’s what they agreed to. They don’t want a substitute arbitrator; they want the AAA.
Sager: And Judge Newsome, that would go to the question of whether the AAA is integral to the party’s agreement. And that’s been briefed extensively. I think they have a mild disagreement with it. But the AAA, there’s nothing about AAA in this process that has been identified by the other side as critical, or integral as the courts say, to the process. But I think that’s the way legally the issue would evolve. And to how this plays out, I mean the agreement is a very good example. Mr. Prossnitz and I don’t agree on everything, but we do agree on Freeman’s importance because Freeman says exactly under the particular factual circumstances here, the district court did not clearly err in finding that JAMS declined to administer the claim due to Smart Pay’s refusal to pay the initial filing fee.
The court: So, the district court here should have taken evidence, allowed discovery, to find out the reason. So, the plaintiff or you issue (a) third-party subpoena, deposition of a AAA representative under the rule for a 30B deposition and you ask him or her, what’s the reason? And then you provide evidence and then they provide evidence and then the court holds a hearing and then decides you violated policy 13.24. And that makes you in default or it doesn’t make you in default. Is the district court acting appropriately within its fear of authority in that circumstance?
Sager: In this case, no. Only if the district court concluded that the issue it was asking to be addressed had been delegated to an arbitrator. So, the district court would have to confront that issue first. And if the district court addressed the issue as it did here with references to bullying the AAA and indolence and things like that, without any facts to back them up, then no, that would be an improper exercise of the district court’s authority. Certainly, the district court could, under FAA rules, it could say we should have more evidence because I don’t have enough to make a judgement here. And I think where the court erred, or at least one of the places where the court erred, was first not addressing the delegatability, or the delegation of the arbitration issue and in not recognizing that it had no factual basis. There is none. To conclude that Wyndham was indolent, or that Wyndham had bullied the AAA. Again, Wyndham and the plaintiffs are ready, willing, and able to arbitrate this case.
The court: Alright, thank you both very much. You’ve been helpful.
The audio can be found by scrolling to April 21, 2023
I have been reading this for a week and listening to the recording, and I was reminded of the old word “filibuster”, a term which is more associated with politics, but by definition “prolong debate and delay or prevent a vote on a bill, resolution, amendment, or other debatable question”, seems very appropriate to this case. As it is very long and arduous to read, we will leave it there for today, and bring you the “Editors” views next week.
We hope you all have a great weekend, Baby Dog has gone on a short vacation to visit his little “hooman” cousins, so things have been a bit quiet around here, but that will soon end.