Hernandez v. MicroBilt Corp.

88 F.4th 215

Maria Del Rosario HERNANDEZ,on behalf of herself and all others similarly situated v. MICROBILT CORPORATION, Appellant

No. 22-3135

United States Court of Appeals, Third Circuit

Submitted Under Third Circuit L.A.R. 34.1(a) September 13, 2023

Filed: December 5, 2023

On Appeal from the United States District Court for the District of New Jersey (D.C. No. 3:21-cv-04238), District Judge: Honorable Freda L. Wolfson

Angelo A. Stio, III, Troutman Pepper, 301 Carnegie Center, Suite 400, Princeton, NJ 08543, Counsel for Appellant

Lauren K.W. Brennan, James A. Francis, John Soumilas, Francis Mailman Soumilas, 1600 Market Street, Suite 2510, Philadelphia, PA 19103, Counsel for Appellee

Before: JORDAN, BIBAS, and PORTER, Circuit Judges

OPINION OF THE COURT

PORTER, Circuit Judge.

MicroBilt Corporation seeks to compel Maria Del Rosario Hernandez to arbitrate her claims under the Federal Arbitration Act. 9 U.S.C. § 4. But Hernandez has fully complied with MicroBilt's arbitration provision, which allows her to pursue her claims in court. We therefore lack the authority to compel arbitration.

I

Hernandez applied for a loan in 2020. The lender relied on a MicroBilt product—an Instant Bank Verification report—to verify Hernandez's identity and bank account information. But the report included the information of other individuals sharing Hernandez's name, one of whom was on a government watch list. The lender denied Hernandez's application based on this inaccurate information.

Hernandez filed a lawsuit claiming that MicroBilt violated the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. MicroBilt moved to compel arbitration because while applying for the loan Hernandez consented to MicroBilt's terms and conditions, including an arbitration provision. Three clauses of this arbitration provision are especially relevant.

First, the provision contains what MicroBilt dubs an "Exclusive Resolution" clause. Opening Br. 8. "[Y]ou agree that any dispute or claim arising out of or relating in any way to your use of this Website and the products and services available hereunder, must be resolved exclusively by binding arbitration." J.A. 148.

Second, the provision incorporates the rules of a third-party arbitration organization. "The arbitration will be conducted before a single arbitrator in accordance with the rules of the American Arbitration Association ('AAA')." Id.

And third, the provision limits the damages and costs that consumers may recover in arbitration: "Each party is responsible for its own attorneys' fees," and "punitive and consequential damages" are not recoverable. Id.

Hernandez voluntarily dismissed her complaint and submitted her claims to the AAA for arbitration. The AAA notified MicroBilt that its agreement with Hernandez was a "consumer agreement," so the AAA's Consumer Arbitration Rules applied. J.A. 30.

Under Consumer Rule 1(a), "[w]hen parties have provided for the AAA's rules . . . as part of their consumer agreement," as Hernandez and MicroBilt have, "they shall be deemed to have agreed that . . . AAA administration of the consumer arbitration shall be an essential term of their consumer agreement." J.A. 57. Under Rule 1(b), the AAA's administrative duties "may be carried out through such of the AAA's representatives as it may direct," not only arbitrators. J.A. 58. And Rule 1(d) addresses the AAA's power to decide whether to administer a dispute:

The AAA administers consumer disputes that meet the due process standards contained in the Consumer Due Process Protocol and the Consumer Arbitration Rules. The AAA will accept cases after the AAA reviews the parties' arbitration agreement and if the AAA determines the agreement substantially and materially complies with the due process standards of these Rules and the Consumer Due Process Protocol. Should the AAA decline to administer an arbitration, either party may choose to submit its dispute to the appropriate court for resolution.

Id. (emphasis added).

Applying these rules, the AAA notified MicroBilt that its arbitration provision included "a material or substantial deviation from the Consumer Rules and/or Protocol." Opening Br. 9-10 (quoting J.A. 150). It found that the provision's damages limitation conflicted with Principle 14 of the Consumer Due Process Protocol, which requires that an "arbitrator should be empowered to grant whatever relief would be available in court under law or in equity." J.A. 122. The AAA stated that it would decline to administer the arbitration under Rule 1(d) if MicroBilt did not waive the damages limitation.

MicroBilt contacted the AAA to object to this administrative decision and learned that an AAA administrator, not an arbitrator, had demanded the waiver. MicroBilt sought review of the administrator's decision before an arbitrator, but the AAA refused. After months passed and MicroBilt did not waive the damages limitation, the AAA declined to administer the arbitration under Rule 1(d).

MicroBilt asked Hernandez to submit her claims to a different arbitrator. But she refused, requesting a hearing before the District Court. She concluded that she "must now pursue her claims in Court" because the AAA dismissed the case under Rule 1(d). J.A. 26. The District Court reinstated Hernandez's complaint and granted MicroBilt leave to move to compel arbitration under 9 U.S.C. § 4. MicroBilt filed its motion, and the District Court denied it.

MicroBilt appealed.

II¹

Before compelling arbitration under § 4, we "must determine that (1) there is an agreement to arbitrate and (2) the dispute at issue falls within the scope of that agreement." Century Indem. Co. v. Certain Underwriters at Lloyd's, London, 584 F.3d 513, 523 (3d Cir. 2009). The parties agree that both conditions are met in this case: A valid arbitration provision covers Hernandez's claims.

But our inquiry does not end there. We may compel arbitration only where there is a "failure, neglect, or refusal . . . to arbitrate under a written agreement." 9 U.S.C. § 4. There must be a "failure to comply" with MicroBilt's arbitration provision, including the rules that it incorporates by reference. Id.

The District Court correctly denied MicroBilt's motion to compel because Hernandez fully complied with MicroBilt's arbitration provision. Under Consumer Rule 1(d), which the provision incorporates, the AAA exercised its power to decline to administer the arbitration. Consumer Rule 1(b) permits AAA administrators to exercise this power, not only arbitrators. And after an administrator exercised this power, Hernandez was permitted to "submit [her] dispute to [an] appropriate court for resolution." J.A. 58. Because Hernandez did not "fail[ ] to comply" with the arbitration provision, we lack authority under § 4 to compel arbitration.

MicroBilt seeks to dodge this straightforward reading of the arbitration provision with a barrage of arguments, including that: (1) the AAA administrator improperly resolved an "arbitrability" issue that should have been resolved by an arbitrator; (2) the provision's Exclusive Resolution clause conflicts with Hernandez's return to court; and (3) the AAA's application of the Consumer Due Process Protocol was unreasonable. None of these arguments succeeds.

A

The AAA declined to administer Hernandez's claims after finding that MicroBilt's arbitration provision did not comply with its "due process standards." MicroBilt argues that this power should have been exercised by an arbitrator, not an administrator, because it raised "arbitrability" issues that were delegated exclusively to arbitrators. This argument fails because the provision allowed administrators to exercise this power and no arbitrability issues were raised.

Arbitration is a creature of contract, so the terms of MicroBilt's arbitration provision govern who, if anyone, was allowed to dismiss Hernandez's claims. Consumer Rule 1(d) allows "the AAA" to "decline to administer an arbitration." J.A. 58. And Rule 1(b) allows the "authority and duties of the AAA" to be "carried out through such of the AAA's representatives as it may direct," not just arbitrators. Id. Declining to administer an arbitration under Rule 1(d) is an "authority" of the AAA. Id. Thus, the AAA may "direct" administrators to "carr[y] out" its authority under Rule 1(d). Id. To this extent, MicroBilt's arbitration provision is consistent with an administrator declining to administer Hernandez's claims.²

MicroBilt argues that administrators may not exercise this power because it implicates "arbitrability" issues that the provision delegates exclusively to arbitrators. Under Consumer Rule 14(a), which the provision incorporates, arbitrators "shall have the power to rule on . . . the existence, scope, or validity of" the provision. J.A. 65 (emphasis added). Courts have found that, solely by operation of Rule 14(a), these "arbitrability" issues fall exclusively to arbitrators. See, e.g., Ciccio v. SmileDirectClub, LLC, 2 F.4th 577, 582 (6th Cir. 2021) ("By incorporating the AAA rules, the parties agreed that an arbitrator would decide gateway questions of arbitrability.").

But the administrator's decision to dismiss Hernandez's claims did not implicate the "existence, scope, or validity" of the arbitration provision, because Hernandez and MicroBilt agree on all three of these gateway issues. J.A. 65. They agree that a valid arbitration provision exists and covers Hernandez's claims. And they agree on the provision's scope: that it incorporates the AAA's Consumer Rules, including Rule 1(d), which empowers the AAA to apply the Consumer Due Process Protocol. See Resp. Br. 12 ("There is no dispute that the AAA's Consumer Rules and Consumer Due Process Protocol apply . . . .").

MicroBilt compares this case to Ciccio, where the Sixth Circuit held that an AAA administrator's application of Rule 1(d) violated an exclusive delegation to arbitrators. 2 F.4th at 582. But there, the parties disagreed over their arbitration agreement's scope—whether it...