Alex Bein

Ninth Circuit Reaffirms District Courts’ Discretion to Dismiss When All Claims Are Subject to Arbitration

March 30, 2023 by Alex Bein

The Ninth Circuit Court of Appeals considered whether the Federal Arbitration Act (FAA) requires a district court to stay a lawsuit pending arbitration, or whether a district court has the discretion to dismiss when all claims are subject to arbitration.

The plaintiffs were current and former employees of Intelliserve, an on-demand delivery service. The plaintiffs sued Intelliserve in Arizona state court, arguing that they were improperly classified as contractors rather than employees. Intelliserve removed the lawsuit to federal court and then moved to compel arbitration. Both parties ultimately agreed that the lawsuit was subject to arbitration but disagreed as to whether the action should be dismissed or stayed by the federal trial court pending the completion of the underlying arbitration. The trial court dismissed the case without prejudice, rejecting the plaintiffs’ argument that the FAA itself mandated that the case be stayed rather than dismissed. The plaintiffs appealed the trial court’s dismissal.

On appeal, the Ninth Circuit acknowledged that section 3 of the FAA expressly provides that where all claims in a lawsuit are subject to arbitration, the trial court “shall” stay the action pending arbitration. However, the court noted that long-standing Ninth Circuit precedent provides that, notwithstanding section 3 of the FAA, “a district court may either stay the action or dismiss it outright when, as here, the court determines that all of the claims raised in the action are subject to arbitration.” The court rejected each of the plaintiffs’ attempts to distinguish such Ninth Circuit precedent, which the court found to be binding on the panel, and rejected the argument that the district court abused its discretion by relying on such precedent. The Ninth Circuit affirmed the district court’s dismissal of the action accordingly.

Forrest v. Spizzirri, No. 22-16051 (9th Cir. Mar. 16, 2023).

Two California Federal Courts Grant Motions to Compel Arbitration, Finding Arbitration Agreement is Neither Procedurally nor Substantively Unconscionable

February 20, 2023 by Alex Bein

In two separate consumer lawsuits against cryptocurrency exchange Coinbase, federal trial courts in California granted Coinbase’s motions to compel arbitration based on the arbitration provision in its user agreement.

In Donovan v. Coinbase Global, Inc. and Pearl v. Coinbase Global, Inc., plaintiffs were customers of defendant Coinbase, a currency exchange that allows users to buy and trade various forms of cryptocurrency. In both cases, Coinbase moved to compel arbitration based on the terms of its user agreement. In their opposition briefs, plaintiffs conceded that they agreed to Coinbase’s user agreement and that the user agreement contained an arbitration agreement. However, plaintiffs argued that the arbitration provision was unconscionable and therefore unenforceable as a matter of law.

As the courts noted, a party seeking to invalidate a contractual provision as unconscionable must prove both “substantive” and “procedural” unconscionability. Procedural unconscionability refers to the manner in which the contract was negotiated. The two courts noted that in the context of contracts of adhesion, the question of procedural unconscionability turns on whether the circumstances of the contract’s formation creates “oppression or surprise,” and whether offending provisions were “buried in a lengthy agreement.” Substantive unconscionability, by contrast, focuses on whether a contract term leads to “overly harsh” or “one-sided” results.

In the two decisions, both courts first addressed procedural unconscionability. The plaintiffs argued that the arbitration agreement in Coinbase’s user agreement was procedurally unconscionable on the grounds that it was presented in “inconspicuous font” and “buried in lengthy text” in the agreement. The courts disagreed, noting that while the user agreement was indeed a contract of adhesion, Coinbase was not the only cryptocurrency exchange available to the plaintiffs, and, in any event, Coinbase reasonably informed its users of changes to the arbitration provision in its user agreement via email and clearly labelled the arbitration provision within the agreement. As such, both courts found only “minimal” procedural unconscionability arising from the arbitration provision in Coinbase’s user agreement.

Regarding substantive unconscionability, the plaintiffs argued that certain provisions of the arbitration agreement were unfairly one-sided, benefitting Coinbase to its consumers’ detriment. Both courts rejected this argument. The Donovan court held that the plaintiffs in that case failed to meet their burden of establishing that the one-sided nature of the referenced provisions rose to the level of unconscionability. While the Pearl court reached the same result, it also found that the plaintiff’s unconscionability challenge was not directed at the specific language delegating arbitrability challenges to the arbitrator, and concluded that the plaintiff’s unconscionability challenge was thus an issue to be decided by the arbitrator in the first instance. In both cases, the courts rejected the plaintiffs’ remaining arguments and granted Coinbase’s motions to compel arbitration.

Donovan v. Coinbase Global, Inc., 22-cv-02826 (N.D. Ca. Jan. 6, 2023)

Pearl v. Coinbase Global, Inc., 22-cv-03561 (N.D. Ca. Feb. 3, 2023)

Delaware Supreme Court Finds Validity of Contract Containing Arbitration Clause to Be Decided By Arbitrator

December 27, 2022 by Alex Bein

In a December 2022 decision, the Delaware Supreme Court considered whether the validity of an arbitration agreement is an issue to be decided by the court or by an arbitrator.

The plaintiff, Agspring LLC, was formed in 2012 by the defendant, NGP X US Holdings, LP, and two nonparties, Ranal Linville and Bradley Clark. In connection with Agspring’s formation, the parties entered into an LLC agreement and a related “services agreement,” both of which contained arbitration provisions providing for the use of JAMS arbitration rules. In 2015, NGP sold Agspring to a group of investors pursuant to a purchase agreement, which provided that any disputes regarding the purchase were to be submitted to state or federal court in Wilmington, Delaware. The 2015 purchase agreement contained an integration clause which stated in relevant part, “this agreement and the related agreements constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and supersede all prior negotiations, agreements, and understandings of the parties with respect to the subject matter hereof.”

In 2019, Clark and Linville sued Agspring in Kansas over matters related to their employment. NGP, Clark, and Linville were subsequently sued by Agspring’s new owners in Delaware state court, alleging fraud and unjust enrichment in connection with the 2015 sale of Agspring. NGP demanded indemnification of costs related to these two actions and Agspring refused, resulting in NGP initiating arbitration under the 2012 LLC agreement and services agreement. The arbitration panel ultimately found that the parties’ 2012 arbitration agreements survived the execution of the 2015 purchase agreement and concluded that NGP was entitled to indemnification for costs incurred in the above referenced lawsuits. Agspring filed a motion to vacate the arbitration award, which the trial court denied.

On appeal, Agspring argued that the trial court erred in concluding that the validity of the parties’ arbitration agreement was an issue for the arbitrator in the first instance. In considering this argument, the Delaware Supreme Court held that “whether a later in time agreement, in this case the [2015 purchase agreement], superseded the 2012 agreements, causing them no longer to exist, would, in our view, be a question to be decided by the court, unless the 2012 agreements show that the parties clearly and unmistakably agreed that such a question would be decided by arbitration.”

The Delaware Supreme Court ultimately concluded that the issue of the continued viability of the 2012 agreements was properly submitted to the arbitration panel, noting that “this result follows from the parties’ agreement [in the 2012 agreements] that the JAMS rules would apply,” including Rule 11(b) of those rules that “disputes, including disputes over the . . . existence . . . of the agreement under which arbitration is sought . . . shall be submitted to and ruled on by the arbitrator.” The Delaware Supreme Court rejected Agspring’s other arguments and affirmed the trial court’s denial of Agspring’s motion to vacate the arbitration award.

Agspring, LLC v. NGP X US Holdings, L.P., No. 2019-1021 (Del. Dec. 2, 2022).

New York Federal Court Holds Questions of Arbitrability to Be Resolved by Arbitrator in Labor Dispute

September 23, 2022 by Alex Bein

In a recent decision, a New York federal magistrate judge considered whether threshold questions of arbitrability were to be decided by the court or by an arbitrator in a labor dispute between a Jewish religious organization and its former employees.

Upon leaving employment at the Kabbalah Centre, the plaintiffs signed separation agreements, which included arbitration clauses providing that any disputes related to employment or to the separation agreement itself were to be decided in arbitration. The plaintiffs nonetheless brought an action against the Kabbalah Centre in federal court, arguing that the separation agreements and their arbitration clauses were the products of improper, coercive tactics by their former employer and were therefore unenforceable. The Kabbalah Centre moved to compel arbitration under the terms of the separation agreements.

As an initial matter, the court distinguished between challenges to an arbitration clause in a contract, and challenges to the contract as a whole. Citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the court noted that the former type of challenge must be decided by the court, while the latter type of challenge was within the purview of the arbitrator.

In granting the Kabbalah Centre’s motion to compel arbitration, the court found that the plaintiffs did not challenge the facial validity of the separation agreements’ arbitration provisions but rather asserted that the contract as a whole should be deemed void. As such, the court looked to the arbitration provisions themselves to determine whether they addressed threshold issues of arbitrability. The court concluded in the affirmative, noting that the separation agreements delegated questions of arbitrability to the arbitrator by incorporating the rules of the American Arbitration Association and JAMS. The court rejected the plaintiffs’ additional arguments and granted the Kabbalah Centre’s motion to compel arbitration accordingly.

Greene v. Kabbalah Centre International, Inc., No. 1:19-cv-04304 (E.D.N.Y. Sept. 1, 2022).

New York Federal Court Finds Arbitration Award Is Subject to Confirmation Even Though It Doesn’t Dispose of All Claims Submitted to Arbitration

September 21, 2022 by Alex Bein

In a recent decision, a New York federal district court considered whether two arbitration awards issued by a tribunal in an ongoing arbitration were “mutual, final, and definite” and thus subject to confirmation proceedings in the district court.

The underlying arbitration involved a long-running dispute between Gerling, a German insurance company, and Tosco Corp., a petroleum refining company, in which Tosco (through successor-in-interest Phillips 66 Co.) sought indemnity and defense costs arising out of its manufacture and sale of petroleum products containing methyl tertiary-butyl ether. On July 13, 2021, Gerling reimbursed Phillips 66 $725,412.94 pursuant to the Gerling policy’s “loss payable” provision in connection with defense costs incurred in certain ongoing lawsuits against Phillips 66. However, on November 26, 2021, the tribunal decided Gerling was not obligated to reimburse Phillips 66 under the “loss payable” provision until the underlying cases had been finally resolved. When Phillips 66 refused to repay the $725,412.94 amount to Gerling, the tribunal issued another order on December 21, 2021, directing Phillips 66 to repay that amount and reaffirming the tribunal’s prior interpretation of the “loss payable” provision. Gerling then sought to have the tribunal’s December 2021 award confirmed by the district court.

In confirming the portion of the tribunal’s December 2021 award directing repayment by Phillips 66, the court noted that that award “required specific action and did not serve as a preparation or basis for further decisions.” Rather, the court characterized it as a “separate and independent claim” that “can be confirmed even though it does not, in and of itself, dispose of all claims.” The court further noted that even though Phillips 66 had repaid the required amount six days before Gerling’s motion to confirm, “the fact that the arbitration award has been complied with is not a ground for refusing to confirm it.”

The district court declined to confirm the portion of the tribunal’s December 2021 award addressing the “loss payable” provision on the grounds that that portion of the award “merely decides issues that bear on future determinations as to claims that still must be made … in order to establish liability.” As a result, the district court granted in part and denied in part Gerling’s motion to confirm the December 2021 arbitration award.

HDI Global SE v. Phillips 66 Co., No. 1:22-cv-00807 (S.D.N.Y. Aug. 26, 2022).