On February 3, 2011, the Illinois Supreme Court held that Section 5 of the Federal Arbitration Act (FAA) would not, under the unique circumstances of the case before it, permit a court to appoint a substitute arbitrator or administrator after the National Arbitration Forum (NAF) ceased administering consumer arbitrations in July 2009.

As we have previously advised, this opinion, Carr v. Gateway, Inc., underscores the need for companies to review their arbitration agreements to ensure that they authorize the use of the American Arbitration Association and JAMS as administrators, and expressly authorize a court to appoint a substitute arbitrator in the event AAA and JAMS are unavailable to serve.

The arbitration agreement in question provided that the parties must resolve disputes “exclusively and finally by arbitration administered by the National Arbitration Forum (NAF) and conducted under its rules. … Should either party bring a Dispute in a forum other than NAF, the arbitrator may award the other party its reasonable costs and expenses, including attorneys’ fees incurred in staying or dismissing such other proceedings or in otherwise enforcing compliance with the dispute resolution provision.” Section 5 of the FAA requires a court to appoint a substitute arbitrator “if for any reason there should be a lapse in the naming of an arbitrator or arbitrators … or in filling a vacancy.”

Refusing to follow other courts throughout the country, the state Supreme Court determined that Section 5 would not apply if the arbitration agreement does not permit the appointment of a substitute arbitrator. The Court first observed “that the mere fact parties name an arbitral service to handle arbitrations and specify rules to be applied does not, standing alone, make the designation integral to the agreement.” However, the Court concluded that Gateway’s arbitration agreement clearly manifested the parties’ intent to preclude a court from appointing a substitute arbitrator when the NAF was no longer available.

Acknowledging that the agreement contained no language expressly precluding such a court appointment, the Court relied on language subjecting a party to a penalty for initiating a case before any forum other than the NAF—language seemingly directed at deterring a party from filing a lawsuit in court. Thus, the Court concluded, the parties intended for there to be no arbitration if the NAF could not be the administrator.

In reaching its decision, the Court ignored the well-established principle under the FAA that any doubts regarding arbitrability of a dispute should be resolved in favor of arbitration. (See Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).) Several other courts have appointed substitute arbitrators for the NAF, often in situations where the arbitration agreements contained severability language. (See, e.g., Levy v. Cain, Watters & Associates, P.L.L.C., No. 2:09-cv-723, 2010 U.S. Dist. LEXIS 9537 (S.D. Ohio. Jan. 15, 2010); Jones v. GGNSC Pierre LLC, 684 F. Supp. 2d 1161, 1167-68 (D.S.D. 2010).)

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs), its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For further information, please contact Alan S. Kaplinsky, Group Chair, at 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com; or Mark J. Levin, 215.864.8235 or levinmj@ballardspahr.com.


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