This presentation addresses the current status of the integral part exception to section 5 of the FAA. A circuit split has developed over the past fifteen years regarding whether the nonexistence of a previously chosen forum invalidates an agreement to arbitrate. Most recently this issue was raised in a December 2015 cert petition in Golden Living Center v. Wert. This presentation discusses the development of the exception and the ensuing circuit split.

1. The Current Status of the Integral
Part Exception to §5 of the Federal
Arbitration Act
Stuart Boyarsky
Kasowitz, Benson, Torres & Friedman LLP
ABA Arbitration Committee
March 4, 2016

2. Golden Living Center-Gettysburg, et al. v. Wert
 FACTS
• Appellee’s mother, while living in Appellant’s nursing home, suffered injuries
and illness that resulted in her death.
• Appellee brought an action. Appellant filed a preliminary objection seeking
arbitration.
The Arbitration Clause:
[A]ny and all claims, disputes, and controversies … shall be resolved exclusively by binding arbitration
to be conducted at a place agreed upon by the Parties, or in the absence of such an agreement, at
the Facility, in accordance with the National Arbitration Forum Code [NAF] of Procedure … In
the event a court having jurisdiction finds any portion of this agreement unenforceable, that portion
shall not be effective and the remainder of the agreement shall be effective. (emphasis added)
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3. Golden Living Center-Gettysburg, et al. v. Wert
 In 2009 NAF accepted the terms of a consent decree with Minnesota's
attorney general under which it would no longer administer consumer
arbitrations.
 NAF had been accused of colluding with credit card companies to include
unfair arbitration clauses in the fine print of their contracts and to appoint
NAF as the arbitrator.
 Trial court found the arbitration agreement to be unenforceable since the
NAF provision was integral to the agreement.
 Superior Court and the Supreme Court of Pennsylvania affirmed.
 Appellants filed a petition for a writ of certiorari on December 18, 2015.
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4. NAF: An Overview
 Founded in 1986.
 Became the nation’s largest arbitrator of consumer disputes.
 In 2006, NAF administered 214,000 debt-collection arbitration proceedings.
 In 2007, the consumer-rights group Public Citizen profiled NAF in an
investigative report, alleging that NAF was biased in favor of businesses.
 In 2008, BusinessWeek published an article discussing NAF’s history of
marketing directly to debt collectors.
 In July 2009 the attorney General of Minnesota filed a lawsuit against NAF,
alleging that its representation as a neutral dispute resolution forum was
unlawfully deceptive due to its affiliation with a major debt-collection agency
and NAF’s marketing of its services to creditors.
 NAF settled three days later, agreeing to permanently cease administrating
consumer arbitrations.
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5. Section 5 of the FAA Requires a
Substitute Arbitrator be Named
“If in the agreement provision be made for a method of naming or appointing an
arbitrator or arbitrators or an umpire, such method shall be followed; but if no
method be provided therein, or if a method be provided and any party thereto
shall fail to avail himself of such method, or if for any other reason there shall
be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling
a vacancy, then upon the application of either party to the controversy the court
shall designate and appoint an arbitrator or arbitrators or umpire, as the case
may require, who shall act under the said agreement with the same force and
effect as if he or they had been specifically named therein; and unless otherwise
provided in the agreement the arbitration shall be by a single arbitrator.”
9 U.S.C. § 5 (emphasis added)
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6. Integral Part Exception
“Only if the choice of forum is an integral part of the agreement to arbitrate,
rather than an ‘ancillary logistical concern’ will the failure of the chosen forum
preclude arbitration.”
Brown v. ITT Consumer Financial Corp., 211 F.3d 1217, 1222 (11th Cir 2000), quoting Zechman v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 742 F Supp. 1359, 1364 (ND Ill 1990).
But when is forum considered integral?
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7. “A federal circuit split and a wide divergence in state court opinions have
materialized over whether these contractual forum selection provisions are
integral or merely ancillary.”
Daniel A. Sito, “Integral” Decisionmaking: Judicial Interpretation of Predispute Arbitration Agreements Naming the
National Arbitration Forum, 81 U. CHI. L. REV. 1991, 1992 (2014)
Integral
 Ranzy v. Tijerina, 393 Fed. App'x
174 (5th Cir. 2010)
Ancillary
 Brown v. ITT Consumer Fin. Corp.,
211 F.3d 1217 (11th Cir. 2000)
 Reddam v. KPMG LLP, 457 F.3d
1054 (9th Cir. 2006)
 Khan v. Dell Inc., 669 F.3d 350 (3d
Cir. 2012)
 Green v. U.S. Cash
Advance Illinois, LLC, 724 F.3d 787
(7th Cir. 2013)
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8. Ranzy v. Tijerina
393 Fed. App'x 174 (5th Cir. 2010)
 Appellee brought action against Appellants.
 Appellants moved to compel arbitration pursuant to clause in the agreement.
 District Court denied motion since the clause “evinces a specific intent of the
parties to arbitrate before the NAF.”
 Fifth Circuit explained that “Section 5 [of the FAA] does not … permit a
district court to circumvent the parties’ designation of an exclusive
arbitration forum when the choice of that forum ‘is an integral part of the
agreement to arbitrate[.]’”
 In affirming the District Court, the Fifth Circuit explained that the language
“shall be resolved by binding … arbitration by and under the Code of
Procedure of [NAF]” demonstrated that the parties agreed that NAF shall be
the exclusive forum for arbitrating disputes.
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9. Brown v. ITT Consumer Fin. Corp.
211 F.3d 1217 (11th Cir. 2000)
 Appellant filed a complaint in district court alleging race discrimination by his
former employer. Appellee moved to compel arbitration pursuant to the
employment agreement.
 Appellant argued that the clause should fail because it required a NAF
arbitration. The District Court disagreed and compelled arbitration.
 After losing the arbitration, Brown moved to vacate award. The District
Court denied the motion.
 In affirming the District Court’s decision, the Eleventh Circuit explained that
“[h]ere there is no evidence that the choice of the NAF as the arbitration
forum was an integral part of the agreement to arbitrate. [Appellant’s]
argument that the arbitration agreement is void because NAF was unavailable
must fail.”
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10. Reddam v. KPMG LLP
457 F.3d 1054 (9th Cir. 2006)
 Appellees hired Appellants to develop a program to reduce its taxes. The
program did not have the desired effect and Appellees incurred substantial
tax liabilities as a result.
 Appellants moved to remove the case to NASD arbitration and the District
Court agreed. However, the NASD refused to hear the arbitration since no
named party was a member of the NASD.
 The District Court held the forum clause was integral and since NASD refused
to hear the arbitration, the clause was unenforceable.
 The Ninth Circuit reversed, explaining that while the clause selected the rules
of the NASD, it did not require arbitration to take place before the NASD
itself. “We see no evidence that the choice was integral here – in fact,
there was not even an express statement that the NASD would be the
arbitrator.”
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11. Khan v. Dell Inc.
669 F.3d 350 (3d Cir. 2012)
 Appellee purchased a faulty computer from Appellant and filed a class action.
 Appellant moved to compel arbitration.
 Appellee argued that the agreement was unenforceable since NAF was
integral to the provision.
 District Court denied the motion.
 Third Circuit held that “it is not clear whether the designation of NAF is
ancillary or is as important a consideration as the agreement to arbitrate
itself. Therefore we must resolve this ambiguity in favor of arbitration.”
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12. Green v. U.S. Cash Advance Illinois, LLC
724 F.3d 787 (7th Cir. 2013)
 Appellee claimed the Appellants misstated the loan’s annual percentage rate.
 Appellants moved to stay litigation due to an arbitration clause in the
agreement.
 Arbitration clause said “shall be … under the Code of Procedure of the
National Arbitration Forum.”
 NAF no longer accepting arbitrations.
 District Court refused to appoint a substitute arbitrator because NAF is “an
integral part of the agreement.”
 Seventh Circuit disagreed, explaining that the agreement only required the
use of NAF’s Code of Procedure, not NAF itself.
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13. Green v. U.S. Cash Advance Illinois, LLC
724 F.3d 787 (7th Cir. 2013)
Judge Easterbrook explained:
“The agreement calls for use of the Forum’s Code of Procedure, not for the
Forum itself to conduct the proceedings. If ¶17 were designed to require
arbitration to be conducted by the Forum exclusively, the reference to its Code
would be surplusage; the only reason to refer to the Code is to create the
possibility of arbitration outside the Forum’s auspices, but using its rules of
procedure.”
“If, as the district judge thought, the designation of the Forum (or at least of its
Code) is ‘integral’ to the agreement, this implies a belief that the customer, the
lender, or both would rather litigate than arbitrate under any other rules or in
any other forum. Does that belief have any support? When the Forum stopped
accepting arbitrations, did any merchant revise its contracts to eliminate the
arbitration clause? Has any customer insisted on the Forum as a condition of
agreeing to arbitration? The district court did not identify anyone, ever, for
whom the answer has been ‘the National Arbitration Forum or no arbitration at
all.’"
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14. Green v. U.S. Cash Advance Illinois, LLC
724 F.3d 787 (7th Cir. 2013)
Where does the “Integral Part” test come from?
When a court declares part of the clause “integral” and that clause is therefore
unenforceable, the court is effectively ignoring the will of Congress which
enacted §5 of the FAA. “As far as we can tell, no court has ever explained what
part of the text or background of the Federal Arbitration Act requires, or even
authorizes, such an approach.”
"The origin of the 'integral part' approach appears to be dictum in Zechman v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 742 F. Supp. 1359 (N.D. Ill. 1990) ...
In the course of granting an employer’s motion to arbitrate a dispute, the district
judge observed in passing that the choice of a particular forum was not 'integral'
to the parties’ bargain. The opinion did not say why an affirmative answer
would matter or give any legal reason for asking the question[.]”
“In the fashion of a rumor chain, later decisions picked up on and elaborated
the language of [Zechman].”
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15. Back to: Golden Living Center-
Gettysburg, et al. v. Wert
Appellants argued:
•Merely agreeing to NAF’s Code of Procedure did not make participation of NAF itself
essential.
•The agreement had a severability clause which indicates the intention was not to make
NAF integral, but rather to make sure all disputes go to arbitration.
•Appellee had testified that she had not read the agreement and did not have an opinion at
the time on NAF’s role.
Supreme Court of Pennsylvania disagreed:
•Contract speaks for itself. Fact that Appellee never read it is irrelevant.
•The agreement required NAF to conduct the arbitration itself, thus making NAF an integral
part of the agreement.
•Distinguishes Green in a footnote, explaining that the agreement here says “shall be
resolved exclusively...” whereas Green’s agreement only provided “shall be resolved by
binding arbitration[.]” But isn’t this a distinction without a difference?
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