New Seventh Circuit Opinion Shows Deepening Circuit Split

The National Arbitration Forum (NAF) ceased administering consumer arbitrations in 2009 after it settled a suit brought by the Minnesota Attorney General.  However, as a recent Seventh Circuit opinion shows, parties continue to select the NAF in consumer arbitration agreements.  Are such arbitration clauses enforceable?

Yes, according to the Seventh Circuit, in a recent 2-to-1 decision.  In Green v. U.S. Cash Advance Illinois, LLC, No. 13-1262 (7th Cir. July 30, 2013) (click here for a copy of the opinion), a majority of the panel instructed a lower court to apply section 5 of the FAA to appoint an arbitrator who would follow the NAF rules.  As explained below, the Seventh Circuit’s opinion deepens a circuit split regarding the extent of a court’s authority to appoint an arbitrator.

The case involved a consumer plaintiff who filed suit against a lender for allegedly misstating a loan’s annual percentage rate.  The lender asked the court to enforce an arbitration clause providing for arbitration to be administered by the NAF, and the lower court refused to enforce the agreement, believing that the choice of the NAF was an “integral” part of the agreement.

Section 5 of the FAA allows district courts to appoint arbitrators under certain situations, including if there is a “lapse” by the parties in naming an arbitrator.  The majority of the panel in Green reasoned that if an arbitration clause lacked sufficient details, such as failing to state the number of arbitrators or what forum will be used, section 5 of the FAA gives courts broad authority to fill in the details.  The majority believed that the parties here agreed to arbitrate, and a district court under section 5 of the FAA has the power to appoint an arbitrator who will follow the NAF rules.

The majority recognized that the Third and Eleventh Circuits had appointed an arbitrator in similar cases involving the NAF, but the Fifth Circuit had reached a contrary result, refusing to compel arbitration because the choice of the NAF was “integral” to the parties’ agreement.  The Seventh Circuit’s majority opinion in Green reasoned that section 5 of the FAA does not incorporate an “integral” standard and depend on whether a particular arbitration forum was “integral” to the parties’ agreement.  In sum, the majority in Green construed section 5 of the FAA as giving district courts broad powers to fill in the gaps in the selection and appointment of arbitrators.

The dissent in Green construed section 5 more narrowly, believing that section 5’s reference to a “lapse” in naming an arbitrator does not cover the situation here, where a contract signed in 2012 refers to an arbitration organization that ceased handling consumer disputes in 2009.  The dissenting opinion construed section 5’s power to appoint an arbitrator to cover only limited circumstances, like situations where there is a stand-off between the parties in choosing a particular arbitrator to serve on a panel, or where there is a lapse in time in choosing an arbitrator, or where a vacancy in a panel occurs.  The dissent believed section 5 should not be used to circumvent a designation of an exclusive arbitral forum, and the agreement here provided for arbitration exclusively before the NAF.

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