Seventh Circuit Holds Company Can Flout Arbitration Agreement Without Consequence

Generally, when you read an opinion holding that there was insufficient evidence of an arbitration agreement between a consumer and a corporation, it’s a win for the plaintiff. But in Wallrich v. Samsung Electronics America, decided by the Seventh Circuit yesterday, the opposite was true.

Paula Wallrich and several thousand other consumers had filed arbitration claims against Samsung, who in turn refused to pay the American Arbitration Association’s filing fees. AAA terminated the arbitration proceedings, and the consumers then moved to compel arbitration in federal district court. The district court then ordered Samsung to arbitrate and pay the fees.

On appeal, the Seventh Circuit reversed. After first addressing an appellate jurisdiction wrinkle (perhaps to be saved for a future blog post), the court held that, even though Samsung conceded that its customers are bound by arbitration agreements, the plaintiffs had failed to establish that they themselves had purchased Samsung products and were so bound. The court suggested each plaintiff should have submitted receipts, confirmation numbers, or other proof of purchase, or declarations, but that a list of their names and a copy of the company’s agreement was not enough.

Of likely greater consequence, though, the court went on to reach an alternative ground for reversal — holding that Samsung did all it was required to do under the arbitration agreement. It was up to AAA, the court held, to decide whether to allow the arbitration to proceed despite Samsung’s intransigence. The court held that “AAA’s discretion over the payment of administrative filing fees, including the consequences that would stem from a party’s refusal to pay those fees” was “bargained for” by the consumers when purchasing their smartphones and tablets. This constituted a “delegation” to the arbitrator, in the view of the 7th Circuit, who in turn “terminated the arbitration.” Thus, in the view of the Seventh Circuit, the parties “fully arbitrated” their dispute even though arbitration never even began.

This seems to drive a truck through the “mutuality” of arbitration agreements, meaning a corporate defendant can effectively choose between an arbitration and court proceedings by simply deciding not to play ball with arbitral rules.

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