Texas Federal Court Holds that Arbitration Agreement Naming NAF as the Arbitrator is Unenforceable

The United States District Court for the Southern District of Texas, Houston Division held that an arbitration agreement naming the National Arbitration Forum (NAF) as the arbitrator was unenforceable because NAF (now unavailable) was an integral part of the arbitration provision.

In Ranzy v. Extra Cash of Texas, No. H-09-3334, 2010 U.S. Dist. LEXIS 22551 (S.D. Tex. March 11, 2010), the arbitration clause at issue stated,

AGREEMENT TO ARBITRATE ALL DISPUTES: You and we agree that any and all claims, disputes, or controversies between you and us and/or the lender, any claim by either of us against the other and/or the lender (or the employees, officers, directors, agents or assigns of the other or the lender) and any claim arising from or relating to your Credit Services and Loan Application, any LOC [Letter of Credit] issued by the CSO [Credit Services Organization] on your behalf, the loan documents that govern your obligations for any loan that you obtain or have previously obtained or later obtain, this CSO Agreement, this Agreement to Arbitrate All Disputes, collection of any loan or loans, collection of any LOC that the CSO issued on your behalf, or alleging fraud or misrepresentation, whether under the common law or pursuant to federal, state or local statute, regulation, or ordinance, including all disputes as to the matters, subject to arbitration, or otherwise, shall be resolved by binding individual (and not class) arbitration by and under the Code of Procedure of the National Arbitration Forum (“NAF”) in effect at the time the claim is filed.

This agreement to arbitrate all disputes shall apply no matter by whom or against whom the claim is filed. Rules and forms of the NAF may be obtained and all claims shall be filed at any NAF office, or on the World Wide Web at www.arb-forum.com, by telephone at 800-474-2371, or at “National Arbitration Forum, P.O. Box 50191, Minneapolis, Minnesota 55405-0191.” Your arbitration fees may be waived by the NAF in the event you cannot afford to pay them. The cost of a participatory hearing, if one is held at your or our request, will be paid for solely by us if the amount of the claim is $ 15,000 or less. Unless otherwise ordered by the arbitrator, you and we agree to equally share the costs of a participatory hearing if the claims is for more than $15,000 and less than $ 75,000. Any participatory hearing will take place at a location near your residence. This arbitration agreement is made pursuant to a transaction involving interstate commerce. It shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16. Judgment upon the award may be entered by any party in any court having jurisdiction.

The first issue decided by the court was whether section 5 of the Federal Arbitration Act (FAA) authorizes the court to name a substitute arbitrator. The court stated,

Although the FAA was designed “to overrule the judiciary’s long-standing refusal to enforce agreements to arbitrate,” it “does not require parties to arbitrate when they have not agreed to do so.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989) (citations omitted). The FAA “simply requires courts to enforce private negotiated agreements to arbitrate, like other contracts, in accordance to their terms.” Id. The FAA does, however, provide for the court to appoint an arbitrator under certain circumstances. Section 5 of the FAA provides:

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 infilling a vacancy, then upon the application 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 otherwise provided in the agreement the arbitration shall be by a single arbitrator.

In determining whether NAF was an integral part of the arbitration agreement, the court concluded:

In the present case, the court need not determine whether § 5 is applicable when a chosen arbitrator becomes unavailable because the NAF was clearly an integral part of the arbitration provision. “Arbitration agreements are subject to the same rules of construction used to interpret contracts.” Harvey v. Joyce, 199 F.3d 790, 794 (5th Cir. 2000). However, any ambiguities must be resolved in favor of arbitration. Id. To determine whether a named arbitrator is an integral part of the arbitration agreement, the court must look to the “essence” of the arbitration agreement. Grant, 678 S.E.2d at 439 (citations omitted). In this case, the plain language of the arbitration provision in both the Note and the Arbitration Agreement explicitly states that all disputes “shall be resolved . . . by and under the Code of Procedure of the [NAF].” Dkt. 15, Exs. 1, 2. Additionally, “all claims shall be filed at any NAF office,” or on the NAF web site. Id.

This is mandatory, not permissive language and evinces a specific intent of the parties to arbitrate before the NAF. See Reddam, 457 F.3d at 1059-61 (outlining criteria for courts to use in determining whether the selection of a specific arbitrator is integral to the arbitration clause and noting, that at a minimum, the arbitrator must be expressly named); Carideo v. Dell, No. C06-1772JLR, 2009 U.S. Dist. LEXIS 104600, 2009 WL 3485933, *4 (W.D. Wash. Oct. 26, 2009) (arbitration provision that provided that disputes “shall be resolved exclusively and finally by binding arbitration administered by the NAF” was sufficient to find the NAF as integral to the arbitration clause) (emphasis added); but see Adler v. Dell, No. 08-cv-13170, 2009 U.S. Dist. LEXIS 112204, 2009 WL 4580739, *4 (E.D. Mich. Dec 3., 2009) (same language as Carideo insufficient to show NAF integral to the arbitration clause). In light of the plain meaning of the arbitration provision, the court cannot appoint another arbitrator even though the NAF is an unavailable forum-the parties “cannot be compelled to arbitrate a dispute if [they have] not agreed to do so.” Nat’l Iranian Oil, 817 F.2d at 335 (citations omitted). The motion to compel arbitration is, therefore, denied.

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