Benjamin Stearns

€643 Million Arbitration Award Was Within Arbitration Panel’s Power to Award and Not a Result of Manifest Disregard of the Law

August 3, 2020 by Benjamin Stearns

Precision Castparts Corp. purchased companies with manufacturing facilities in the United States and Germany for €800 million. After the sale closed, Precision discovered that the seller had “manipulated financial documents of the acquired companies to show that they were ‘high margin’ and ‘high cash flow’ businesses. In fact, the acquired companies were ‘functionally insolvent.'”

Precision instituted an arbitration before the American Arbitration Association, International Centre for Dispute Resolution, alleging claims for fraudulent inducement and breach of warranty. The tribunal found that the seller breached the contractual agreement and fraudulently induced Precision to purchase the acquired companies. The tribunal awarded damages of €643 million for the fraudulent inducement claim, and €100 million for the breach of contract claim, which was subject to a contractual cap of the same amount. The tribunal stated that the breach of contract award was subsumed within the €643 million fraudulent inducement award and was not in addition to that amount.

The Southern District of New York confirmed the award, finding that it was within the scope of the arbitrators’ power and that the arbitrators had not engaged in manifest disregard of the law. The seller argued that the tribunal disregarded two Delaware legal doctrines, the rehash doctrine and the bootstrapping doctrine, which are “intended to prevent taking contract breach and damages allegations and dressing them up as a fraud claim for the same damages where the contract and fraud allegations are materially identical.”

In rejecting the seller’s argument that the claim was subject to the rehashing or bootstrapping doctrines, the tribunal found that, although there was overlap between the two claims, the “fraudulent misconduct went well beyond breaches of the [contract].” “The broader and different nature of the conduct pleaded to support the fraudulent inducement claims, combined with the additional pleading of intent, which is an element of fraud but not contract breach, was enough to defeat [the seller’s] bootstrapping argument.”

With regard to the rehashing doctrine (which focuses on the claimed damages as opposed to the bootstrapping doctrine, which focuses on the claimed basis for liability), the court found that the rehashing doctrine did not apply because the contract breach claim was limited to €100 million by the contractual indemnity cap, but the fraudulent inducement claim was not subject to any cap. The court found that the tribunal’s determinations did not manifestly disregard the law but rather were well supported by the law. In addition, the issues were within the scope of the arbitrators’ powers as both claims arose from the acquisition that was the subject of the contract, and the contract provided for arbitration of any claim or controversy arising out of or related to it.

Precision Castparts Corp. v. Schulz Holding GmbH & Co. KG, No. 1:20-cv-03029 (S.D.N.Y. July 20, 2020).

Determining Whether “Clickwrap Agreement” Provides “Reasonable Notice” of an Arbitration Agreement Is a Fact-Intensive Inquiry

July 13, 2020 by Benjamin Stearns

Timothy Hidalgo sued the Amateur Athletic Union of the United States Inc. (AAU) on behalf of a purported class for damages emanating from a data breach suffered by the AAU. The court granted the AAU’s motion to compel arbitration.

Hidalgo used the Safari web browser on his iPhone to access and complete the AAU membership application. Because the AAU application was “not compatible for smartphone use,” the plaintiff “had to move the screen back and forth for each line of text and zoom in and out because the full application was not visible on the iPhone screen at one time.” The application contained a “clickwrap agreement” that required Hidalgo to click an “I agree” box after being presented with a list of terms and conditions of use. The court noted that to be bound by an arbitration agreement contained within the clickwrap agreement, the web user must have “reasonable notice of the arbitration provision.” The parties disputed whether the web-based application provided sufficiently reasonable notice of the arbitration provision.

The court discussed several recent cases that examined the enforceability of arbitration provisions contained within clickwrap agreements and identified the following facts as relevant:

The font size, bolding, and capitalization of the relevant language;
The color of the hyperlink directing the user to the full agreement and whether it “stands out” from the other language;
Whether the language next to the checkbox sufficiently notifies the user that he or she is entering into an agreement (as opposed to merely completing a purchase or step, e.g., clicking “place your order” does not specifically manifest assent to additional terms);
The layout of the page, including whether the page is “cluttered”;
Whether the relevant language directing the user to the full agreement is conspicuously placed on the webpage;
The number of other links on the same webpage;
The number of different font types and sizes used on the same webpage;
Whether the page contains distracting elements, such as other “buttons” or “promotional advertisements”; and
Whether notice of the full agreement is provided contemporaneously with the user’s agreement (i.e., on the same page), or later in time (i.e., via a follow-up email).

In sum, the “inquiry whether a web user had ‘reasonable notice’ of contract terms contained in a contract accessible by hyperlink depends on the ‘totality of the circumstances.'” Here, the “AAU application screen clearly draws a reasonable user’s attention to it because of the blue hyperlinks, the red asterisks, the normal font size, and the clear contrast between the mostly black text and the yellow background.” In addition, the terms and conditions box was “prominently placed squarely in the middle of the very end of the application, which is a conspicuous part of the application because it is the last place an applicant looks before finishing the application process.” After discussing other characteristics of the webpage, the court found that the user had sufficient “reasonable notice” of the arbitration provision contained within the clickwrap agreement, and therefore the arbitration agreement was enforceable.

Hidalgo v. Amateur Athletic Union of the United States, Inc., No. 1:19-cv-10545 (S.D.N.Y. June 16, 2020).

Court Denies Vimeo’s Motion to Compel Arbitration of Purported Class Action Claims Under Illinois Biometric Information Privacy Act

June 22, 2020 by Benjamin Stearns

Vimeo Inc. sought to compel arbitration of putative class claims brought by Bradley Acaley relating to the use of Magisto, a video creation app. Acaley claimed that the app’s use of face-geometry scan technology violated the Illinois Biometric Information Privacy Act (BIPA). The app’s terms of service included a clause providing for binding arbitration of “all disputes, controversies and claims.” However, the terms also provided an “exceptions to arbitration” clause, which excepted claims “related to, or arising from, allegations of … invasion of privacy.”

Acaley first argued that no valid agreement to arbitrate existed because he never “assented to the terms of service.” “Illinois contract law requires that a website provide a user reasonable notice that his use of the site or click on a button constitutes assent to an agreement.” To determine whether a user has received reasonable notice, courts ask “whether the web pages presented to the user adequately communicated all the terms and conditions of the agreement, and whether the circumstances support the assumption that the user received reasonable notice of those terms.” Although the notice was in smaller font and partially obscured at times by pop-up windows, the court found that Acaley received sufficient reasonable notice from the app’s welcome page, which stated, “By continuing I agree to the terms,” where the word “terms” provided a hyperlink to the terms of service. In addition, a second webpage displayed in “smaller but still conspicuous font” the statement, “By starting you agree to our terms and privacy policy.” As such, the parties had formed a valid arbitration agreement.

The court found, however, that Acaley’s claims for invasion of privacy were clearly excepted from the agreement to arbitrate. The court determined that violations of BIPA constitute an “invasion of privacy” as that term was used in the arbitration agreement and that the exception applied to such claims brought by either party, not just Vimeo. Therefore, the court concluded “with positive assurance” that the arbitration agreement did not apply to Acaley’s BIPA claim and refused to compel arbitration.

Acaley v. Vimeo, Inc., No. 1:19-cv-07164 (N.D. Ill. June 1, 2020).

Split Decision in the Ninth Circuit: Two Non-Signatory Defendants Can Compel Arbitration Based on Equitable Estoppel, One Cannot

June 1, 2020 by Benjamin Stearns

All three defendants were non-signatories to the underlying contract containing the arbitration agreement they sought to enforce. They each contended that they were entitled to enforce the arbitration agreement, despite their non-signatory status, through equitable estoppel. “The right to compel arbitration is generally limited to parties to the contract, but non-signatories may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement.” California law, which applied to the contract at issue, permits non-signatories to assert equitable estoppel to seek arbitration where: (1) the signatory must rely on the written agreement, or the signatory’s claims are intertwined with the agreement; or (2) the signatory alleges concerted misconduct by the non-signatory and another signatory, and the misconduct is intimately connected with the obligations of the agreement.

With regard to the first defendant, the court determined that none of the plaintiffs’ claims relied upon, were founded in, or were intertwined with the terms of the contract containing the arbitration agreement. In addition, the plaintiffs’ claims did not allege collusion or a pattern of concealment involving that defendant and a signatory to the contract. Therefore, under California law, the first defendant could not invoke equitable estoppel to compel arbitration. However, with regard to the other two defendants, the court determined that although the plaintiffs’ complaint did not explicitly mention the contract, their allegations regarding the defendants were “exactly the terms and duties of the [contract].” As such, the plaintiffs’ claims were founded in and inextricably intertwined with the terms and obligations of the contract containing the arbitration agreement. Therefore, the second set of defendants could invoke equitable estoppel to compel the plaintiffs to arbitrate their claims.

In re Pacific Fertility Center Litigation, No. 19-15885 (9th Cir. May 15, 2020).

District Court Orders Insurer in Receivership to Arbitrate With Reinsurers, Rejecting Argument That Jurisdiction Rests With Receivership Court and That McCarran-Ferguson Act Preempts FAA

May 11, 2020 by Benjamin Stearns

The District Court of Puerto Rico upheld a prior judgment ordering Integrand Assurance Co. to arbitrate its claims against its various reinsurers, rather than remand the case to the court overseeing Integrand’s receivership, the Superior Court of the Commonwealth of Puerto Rico.

Integrand commenced proceedings against the reinsurers in order to recover assets that the reinsurers purportedly owed Integrand. In support of its argument that the proceedings should be remanded, Integrand argued that, under the Puerto Rico insurance code, the Superior Court of Puerto Rico had “exclusive jurisdiction to attend” to any action by or against Integrand and its estate subsequent to the commencement of receivership proceedings. Integrand further argued that the McCarran-Ferguson Act preempted the application of the Federal Arbitration Act to the parties’ dispute.

The court disagreed with Integrand, finding that, under the U.S. Supreme Court’s test in Humana v. Forsyth, the FAA was not preempted because the application of the FAA to the parties’ dispute would not “invalidate, impair, or supersede the state statute regulating insurance.” The court found that the provisions relied upon by Integrand related clearly and exclusively to the commencement of receivership proceedings. The instant dispute, however, was over entitlement to certain assets, not the commencement of receivership proceedings. The exclusive jurisdiction provisions, therefore, did not apply.

The court also distinguished this case from prior cases holding that, in the context of a liquidation proceeding, the FAA was preempted. Significantly, in those prior cases, the action was brought by other entities against the assets of a delinquent insurance company, unlike in this case, in which the action was brought by and for the delinquent insurance company in an attempt to recover assets supposedly owed to it. Finding that the FAA applied, the court upheld the order that the parties proceed with the arbitration of their dispute.

Integrand Assurance Co. v. Everest Reinsurance Co., No. 3:19-cv-01111 (D.P.R. May 1, 2020).