More Arbitration Related Case Law - Arbitration Clause Not Enforceable

Another recent case, Henry v. Gateway, Inc., et. al., (No. 0537, September Term 2008, Issued August 31, 2009), shows that binding arbitration clauses are not always binding in Maryland. The case arose from plaintiff-appellant’s purchase of a Gateway computer at a local Best Buy retail store, and the subsequent malfunctioning of said computer. The computer came with a standard One Year Limited Warranty, the terms of which the consumer was required to agree to in order to render the computer operational. One of those terms was submission of all disputes to binding arbitration, which would be governed by the Federal Arbitration Act, 9 U.S.C. § 1, et. seq. Disregarding the binding arbitration clause, plaintiff-appellant elected to file a complaint in The Circuit Court for St. Mary’s County, alleging three state law claims: 1) breach of express warranty; 2) breach of implied warranty; and 3) violation of the Maryland Consumer Protection law, Md. Code (1975, 2005 Repl. Vol.), Commercial Law Article §§13-101 et seq. In addition, there was one federal claim: violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et. seq. The Circuit Court for St. Mary’s County ruled in favor of defendant-appellee, dismissing plaintiff-appellant’s state law claims (with prejudice) and ordering the arbitration of said claims.

On appeal, the Court of Special Appeals of Maryland ruled that the binding arbitration clause in the consumer contract was unenforceable given a 2007 ruling by the Court of Appeals of Maryland, Koons Ford of Baltimore, Inc. v. Lobach, 398 Md. 38 (2007). In Koons Ford, the Court of Appeals held that the Magnuson-Moss Warranty Act supersedes the Federal Arbitration Act, so that a litigant advancing a federal warranty claim cannot be forced to resolve his or her claim through binding arbitration.

Further, the contract in Henry had a South Dakota choice-of-law designation. The choice-of-law question was whether, in the absence of a controlling decision by the U.S. Supreme Court, and given the divided nature of the relevant federal precedent, a Maryland Court is bound to apply a contractual choice-of-law rule that has the effect of interpreting federal law in a way inconsistent with a decision of the Court of Appeals of Maryland. The Court of Special Appeals answered with a resounding no, finding that it would be contrary to the fundamental policy of the state (as embodied in Article 2 of the Maryland Declaration of Rights, and a 1979 case, Pope v. State) for a Maryland court to apply a choice-of-law provision that conflicts with the state’s highest court’s interpretation of federal law.

The Circuit Court for St. Mary’s County ruling was reversed and the case was remanded to that court for further proceedings. The Court of Special Appeals ordered that all costs be covered by defendant-appellant.

It just goes to show that what is written in a contract is not always an accurate reflection of a consumer’s actual rights and/or potential recourse.

Court Decides Unsigned Arbitration Agreement is Not Enforceable

In a recent Maryland Court of Special Appeals decision, All State Home Mortgage, Inc. v. Francis A. Daniel, et al., (No. 579, September Term, 2008; Filed June 9, 2009) that Court upheld a Montgomery County Circuit Court decision regarding the unenforceability of a standard arbitration agreement relating to a contract for the refinancing of residential real estate. In this case, a Rockville, Maryland couple attempted to secure a loan from All State Home Mortgage (“All State”) in order to refinance their home. Citing “issues” with the appraisal of the house, All State initially delayed funding the loan. Although the loan officer made assurances that everything was “okay,” All State never disbursed money pursuant to the loan agreement. The following month, All State contacted the Rockville couple and attempted to change the terms of the loan, which included a reduction in the loan amount. Rather than accepting these new terms, the homeowners filed suit in the Circuit Court for Montgomery County. All State filed a petition to compel arbitration. The Circuit Court originally granted the petition to compel arbitration. On a motion for reconsideration, however, the Court changed its decision and denied the defendant's petition to compel arbitration. The defendant appealed.

The Court of Special Appeals affirmed the denial of the petition to compel arbitration. The Court found that All State had neglected to sign its own arbitration agreement which stated, in part, as follows:

AGREEMENT FOR THE ARBITRATION OF DISPUTES
(“We, our or us) request the person(s) named below (“you”) to contact us immediately if you have a problem with a loan application or loan transaction with us. . . . If we are not able to resolve our differences informally, you and we agree that any dispute, regardless of when it arose, shall be settled, at your option or ours, by arbitration in accordance with this Agreement. Judgment on the arbitrator’s award may be entered in any court having jurisdiction. Except as otherwise expressly provided by applicable law, there is no right of judicial review of any award by the arbitrator. . . . This agreement is effective and binding to you and your heirs, successors and assigns and us when both parties sign it.

Not only did All State fail to sign the arbitration agreement, it failed to include an All State logo or any other information identifying itself as the other party to the agreement. The couple who had sought to refinance their home had signed the arbitration agreement, but argued that the absence of All State’s signature on the document meant that no agreement to arbitrate was ever made.

The Court stated that ordinarily a signature is not necessary to bring a contract into existence, and a signature is not always necessary to the execution of a written contract. However, when the terms of the contract make the parties’ signatures a condition precedent to the formation of the contract, the signature becomes an essential part of the agreement. In the absence of signatures of both parties, no binding arbitration agreement existed and the Rockville couple was free to proceed against All State in a court of law.

Maryland Court of Appeals Quotes Jerry Seinfeld, Rules in Favor of Tom Clancy on Fiduciary Duty Claim

In an interesting juxtaposition of pop culture icons, the Maryland Court of Appeals cited Jerry Seinfeld in an opinion ruling in favor of novelist Tom Clancy. The case is Clancy v. King (opinion available here), decided August 26, 2008. In the case, Tom Clancy’s ex-wife (King) sued Clancy when Clancy decided to remove his name from the “Op-Center” series of books to which he had licensed his name. The Circuit Court for Calvert County had ruled in favor of ex-wife King issuing a declaratory judgment that Clancy’s removal of his name from the series was a breach of his fiduciary duty to King and the partnership. The Court of Special Appeals affirmed but remanded to the Circuit Court for Calvert County, Maryland for some clarification. Before any such clarification by the Circuit Court could occur, the Court of Appeals granted Certiorari and reversed.

The Court of Appeals held that while Clancy’s actions would have been a breach of fiduciary duty under typical circumstances, those actions were not a breach of fiduciary duty because of language in the partnership agreement that limited Clancy’s duties. In so holding, the Court determined that parties to a partnership can agree to limit their duties to one another and that their agreement would be analyzed under contract law and not under traditional partnership law.

In discussing the contract law issue, the Court found that Clancy’s actions were limited only by good faith, and not the broader fiduciary duties usually enforced against partners. The Court’s discussion of good faith led the Court to the 1996 “The Wig Master” episode of Seinfeld. Specifically, the Court (at footnote 27) referred to the episode as follows:

Jerry Seinfeld, perhaps an unlikely legal illustrator, once epitomized the duty of good faith in contract. In an episode of his television show, Jerry's character purchased a jacket at a men's clothing shop. The terms of the contract permitted Jerry to return the item for refund at his discretion. When Jerry attempted to return the jacket after an unrelated personal quarrel with the salesman, the following discussion took place.

Jerry: Excuse me, I'd like to return this jacket.
Clerk: Certainly. May I ask why?
Jerry: For spite.
Clerk: Spite?
Jerry: That's right. I don't care for the salesman that sold it to me.
Clerk: I don't think you can return an item for spite.
Jerry: What do you mean?
Clerk: Well, if there was some problem with the garment. If it were unsatisfactory in some way, then we could do it for you, but I'm afraid spite doesn't fit into any of our conditions for a refund.
Jerry: That's ridiculous, I want to return it. What's the difference what the reason is?
Clerk: Let me speak with the manager . . . excuse me . .. Bob! (walks over to the manager and whispers)
Bob: What seems to be the problem?
Jerry : Well, I want to return this jacket and she asked me why and I said for spite and now she won't take it back.
Bob: That's true. You can't return an item based purely on spite.
Jerry: Well, so fine then . . . then I don't want it and then that's why I'm returning it.
Bob: Well you already said spite so . . . .
Jerry: But I changed my mind.
Bob: No, you said spite. Too late.
Seinfeld: The Wig Master (NBC original television broadcast 4 April 1996).

In attempting to exercise his contractual discretion out of "spite," Jerry breached his duty to act in good faith towards the other party to the contract. Jerry would have been authorized to return the jacket if, in his good faith opinion, it did not fit or was not an attractive jacket. He may not return the jacket, however, for the sole purpose of denying to the other party the value of the contract. Jerry's post hoc rationalization that he was returning the jacket because he did not "want it" was rejected properly by Bob as not credible.

The Court’s sense of humor is refreshing, and serves to illustrate that the Court is made up of people just like everyone else who draw on all of their experiences in making reasoned judgments. Of course, Ms. King and her counsel probably aren’t laughing….