Earlier this week, when I was trying to access Netflix on my television with my kids, Netflix would not allow me to view any shows unless I re-acknowledged its terms of service (I have been a Netflix customer for years.) Because of my fascination with dispute resolution, I was curious whether Netflix’s terms included an arbitration clause, and so I proceeded to view the terms of service on my television screen while my children waited. There was no scroll down option when reading Netflix’s terms, and so I had to advance through the terms, screen by screen on my television, by pressing the next button. After viewing more than 50 screens of the contract (and facing increasing howls of complaints from my kids), I finally reached the arbitration section, which was rather detailed and tailor-made, compared to simpler arbitration clauses I have seen. (To be fair to Netflix, Netflix did allow me to click “I agree” without going through the inconvenient process of reviewing the entire contract screen by screen and trying to tune out howling kids.)
Netflix’s arbitration clauses (in section 7.4) allows for a court to engage in a de novo review of certain types of arbitral awards. In other words, you can go through the arbitration process, which is supposed to be binding and final. But under this provision of Netflix’s arbitration clause, you can then have a court hear the same issues anew without being bound by the arbitrator’s award, which is contrary to the finality traditionally associated with arbitration.
Yesterday, the Sixth Circuit addressed a similar arbitration provision allowing for de novo judicial review of an arbitrator’s award, and the Sixth Circuit explained that such a provision is invalid under the Federal Arbitration Act (FAA). Relying on the Supreme Court’s decision in Hall Street v. Mattel from 2008, the Sixth Circuit recognized that the FAA provides the exclusive grounds for vacatur of an arbitrator’s award, and such grounds are extremely narrow, deferential, and do not include de novo judicial review. Although arbitration provisions regarding de novo review are invalid under the FAA, the Sixth Circuit ultimately held that the party at issue had waived this particular argument because the party had engaged in the arbitration. The Sixth Circuit’s decision is PolyOne Corp. v. Westlake Vinyls, Inc., No. 19-5137 (6th Cir. Sept. 6, 2019) (click here for a copy of the decision.)
This Sixth Circuit case did not involve Netflix, and instead involved an arbitration clause in an agreement regarding environmental cleanup costs for a Superfund site. But under the Sixth Circuit’s analysis of the arbitration provisions, Netflix’s arbitration agreement is problematic because of its terms allowing for de novo judicial review. The Sixth Circuit also raised the possibility that if an arbitration clause contains invalid terms permitting de novo review, perhaps these invalid terms would negate the entire obligation to arbitration, or perhaps the invalid terms could be severed, leaving the rest of the arbitration agreement intact. The Sixth Circuit recognized that the Supreme Court’s Hall Street decision left open this issue of invalidation vs. severance. (If you are interested in this invalidation vs. severance issue, I address this topic in a recent law review article. I developed some arguments, based on the text of the FAA, its history, and policy, that severance should not be allowed under the FAA for consumer or employment disputes, and if an arbitration clause contains an invalid term, a court must invalidate the entire agreement.)
There is one other interesting issue with the Sixth Circuit’s opinion. Based on the description from the opinion, the parties’ agreement regarding environmental cleanup costs appears to involve an appraisal process – whereby a neutral person simply determines a fair dollar value for a given transaction, product, or service, as opposed to determining the broader legal rights or obligations of a party. I did not read the full underlying agreement at issue in the Sixth Circuit case, but the court’s description suggests an appraisal provision is involved. I don’t think the FAA was designed to cover appraisal provisions. Without addressing this issue at all, the Sixth Circuit’s opinion appears to operate under the assumption that the FAA controls this fact pattern.