A class of device users filed arbitration demands before the American Arbitration Association (AAA), claiming the device company illegally collected and stored sensitive data. The device users had agreed to the device company’s terms and conditions that mandated “all disputes… shall be resolved exclusively through final and binding arbitration” under AAA rules. AAA rules provide for “initial filing fees” that both parties must pay to proceed with arbitration. The AAA requested $4,125,000 from the device company to cover administrative filing fees, which the device company refused to pay. Next, the AAA offered the consumers the opportunity to advance the company’s fees, but they denied and asked the AAA to stay the proceedings until they could obtain a court order compelling arbitration, which the AAA denied. The device users attempted under 9 U.S.C. §4 to compel the company to pay the fees and to arbitrate their claims. The district court ordered the company to pay and proceed to arbitration, and the company appealed.
In Wallrich v. Samsung Elecs. Am., Inc., 106 F.4th 609 (7th Cir. 2024), the court reversed the district court's decision due to the users' failure to meet the first and third elements of a claim to compel arbitration. The court began by discussing two potential “jurisdictional hurdles.” First, the court concluded that the district court had subject matter jurisdiction under 9 U.S.C. § 203 because the dispute “indisputably arose out of a commercial relationship” and the device company is not a U.S. citizen. Second, the court determined it had appellate jurisdiction because the district court’s decision ended the litigation on the merits, and the court issued an appealable final decision under §16(a)(3) of the Federal Arbitration Act (FAA). The court then discussed the merits and began with the elements a party must show to compel arbitration under the FAA: “(1) an enforceable written agreement to arbitrate; (2) a dispute within the scope of the arbitration agreement; and (3) a refusal to arbitrate.” The court addressed the device company’s arguments regarding the first and third elements. For the first element, the court found that because an individual agrees to arbitrate when purchasing a device, all the users had to show that they were customers of the company’s devices. However, the users submitted evidence of the user’s names and devices, copies of the company’s terms and conditions, and the AAA’s determination that the users had met the filing requirements but that was not enough to meet this first element because it did not prove that they were customers of the device company. The court explained that the device users could have met their burden by producing “receipts, order numbers, or confirmation numbers from their purchase.” The court then discussed the third element and decided that the district court had exceeded its authority and the scope of the arbitration agreement when it ordered the company to pay the fees. The court relied on several court cases, including Howsam v. Dean Witter Reynolds. Inc., 537 U.S. 79, 84 (2002), when stating that procedural issues, including fee disputes, are “presumptively not for the judge, but for an arbitrator, to decide.” The court noted that the FAA does not provide the device users with “an unfettered right to arbitrate” and that, under AAA rules, they had the opportunity to advance the fees to compel arbitration. Once the device users refused to advance the device company’s fees, the AAA terminated the arbitration, and the district court could not compel arbitration. Because the users did not meet two out of three of the elements, the court reversed the district court's decision.
By Ashley Boyce, [email protected]
Edited By Hayden Mariott, [email protected]