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Missouri Supreme Court Opinion Calls Into Question Many Consumer Arbitration Agreements

ABSTRACT: In a blow to the enforceability of arbitration clauses found in many existing consumer contracts, the Missouri Supreme Court declines to appoint a substitute arbitration provider after the agreed-upon arbitration forum's "sudden and unforeseen departure" from the scene.

The Missouri Supreme Court recently issued an opinion that could undercut the arbitration clauses found in many existing commercial contracts. In A-1 Premium Acceptance, Inc. v. Hunter, the court refused to name a substitute arbitration forum when the parties’ agreed-upon arbitrator—the National Arbitration Forum—suddenly and unexpectedly stopped providing arbitration services in consumer claims nationwide.

By way of background, the National Arbitration Forum was one of the nation’s largest providers of arbitration services for consumer debt collection claims. In 2008, NAF administered over 200,000 cases. But a series of lawsuits alleged unfair practices and hidden ties to the debt collection industry, culminating in a July 2009 action by Minnesota’s attorney general. Just three days after the Minnesota case was filed, NAF entered into a consent judgment compelling it to immediately stop administering consumer credit arbitrations nationwide. (NAF has since re-branded as Forum and now focuses on internet domain-name disputes.)

Meanwhile, many existing consumer credit contracts were written with language requiring binding arbitration of consumer protection claims by the borrower and expressly naming NAF as the forum for arbitration. Several such agreements existed between A-1 Premium Acceptance, a payday lender operating as “King of Kash,” and borrower Meeka Hunter. Ms. Hunter had originally taken out four loans in 2006, totaling $800. When she defaulted almost nine years later, interest had grown the total debt to over $7,000. A-1 sued on the debt, and when Ms. Hunter filed a counterclaim alleging violations of the Missouri Merchandising Practices Act, A-1 sought to enforce the arbitration clauses from the original loan agreements.

Unfortunately, those clauses provided that that consumer claims “shall be resolved by binding arbitration by the National Arbitration Forum, under the Code of Procedure then in effect.” Conceding that NAF was no longer available to arbitrate the claims, A-1 asked the circuit court to appoint a substitute arbitrator, as authorized by the Federal Arbitration Act in the event of “a lapse in the naming of an arbitrator.” The circuit court refused to do so, and A-1 appealed.

The Missouri Supreme Court affirmed the lower court’s decision on the grounds that the language from the subject arbitration clauses stated an intent to arbitrate only before NAF. The opinion distinguished this type of agreement from those that express an agreement to arbitrate generally, regardless of the availability of a named arbitrator. Noting that A-1 drafted the agreement and chose to “insist upon NAF—and only NAF—as the arbitration forum,” the Court refused to “expand the arbitration promise [A-1] extracted from Hunter” by naming someone else as a replacement arbitrator. Since arbitration before NAF was not possible, the Court held, Ms. Hunter was free to pursue her claims in Missouri state court, a much more receptive forum for consumer protection claims like these.

Notably, the arbitration clauses at issue never expressly stated that arbitration could proceed “only” or “exclusively” before NAF. Instead, the court relied primarily on three factors to conclude that the parties had agreed to arbitrate only before NAF: (1) the language mandating that claims “shall be resolved by arbitration by the National Arbitration Forum” (emphasis added by the court); (2) the fact that A-1 drafted the contract and could have included language contemplating the unavailability of its preferred arbitrator, noting that many contracts do just that; and (3) language mentioning the “Code of Procedure then in effect,” a reference to the 2006 NAF Code of Procedure, which includes a rule that only NAF can administer the Code. Combined, the court concluded, these provisions showed that the parties agreed to arbitrate “before NAF and no other arbitrator.”

The Court finished, however, by cautioning that “merely identifying an arbitrator in an arbitration agreement—without more—cannot justify refusing to name a substitute.” A substitute should still be named unless there is “a basis to conclude the parties’ arbitration agreement was limited to the specified arbitrator,” which the Court determined existed in this case.

This decision adds to a wild profusion of existing case law addressing the numerous and diverse arbitration agreements that name NAF as arbitrator. Although the result invariably depends on the language of the particular contract at issue, courts across the nation that have taken the same approach as the Missouri Supreme Court and denied applications to compel arbitration include the Second, Fifth, and Eleventh Circuit Courts of Appeals, and the New Mexico Supreme Court. But the Third and Seventh Circuits and the Supreme Courts of Arkansas and South Dakota have reached the opposite result, appointing substitute arbitrators in place of NAF. Federal district courts across the country have come down on both sides. A-1’s attorneys have expressed an intent to appeal this Missouri decision to the United States Supreme Court, hoping to bring some clarity to this recurring and divisive issue.

This case demonstrates the importance, especially in Missouri, of exercising caution when drafting arbitration clauses. This is particularly true in the context of consumer transactions, where one side typically sets the terms of the transaction. If the intent is to ensure that disputes end up in private arbitration instead of state court litigation—then naming a preferred arbitrator is fine, but it is also essential to plan for the possibility that the arbitrator is unavailable. Otherwise, as A-1 experienced here, the agreement to arbitrate may be for naught.

The Missouri Supreme Court’s opinion is available here.