Benjamin Stearns

Ninth Circuit Dismisses Appeal of Denial of Motion to Compel Arbitration as Moot After the Complaint Was Amended While the Appeal Was Pending

February 24, 2023 by Benjamin Stearns

The plaintiff’s original complaint relied on a certain purchase agreement (PA) that included an arbitration clause. While the appeal was pending, the lower court permitted the plaintiff to amend the complaint to no longer rely on the PA for its claims. As a result, the plaintiff contended that the appeal was moot since there was no longer a basis to invoke the arbitration clause. The appellants, however, challenged the lower court’s ruling permitting an amendment to the pleading during the appeal, and further argued that the amended complaint still relied on the PA.

The Ninth Circuit held that a “plaintiff is master of the complaint and an appeal seeking review of collateral orders does not deprive the trial court of jurisdiction over other proceedings in the case.” (Citing Ninth Circuit precedent and noting that the U.S. Supreme Court has granted a petition for a writ of certiorari to resolve the split in the circuits on whether an appeal of the denial of a motion to compel arbitration “oust[s] a district court’s jurisdiction to proceed with litigation pending appeal” or instead, whether “the district court retain[s] discretion to proceed with litigation while the appeal is pending.”)

The Ninth Circuit then concluded that the amended complaint did not rely on the PA, and, in any event, the plaintiff stipulated that he had abandoned any claim under the PA. The court therefore dismissed the appeal as moot.

Matter of Giga Watt, Inc., Case No. 22-35104 (9th Cir. Dec. 23, 2022).

Arbitration Provision Treated as Standalone Contract for Purposes of Determining Parties Capable of Compelling Arbitration

February 2, 2023 by Benjamin Stearns

The Ninth Circuit Court of Appeals reversed a district court decision and compelled arbitration based on its determination that one of the litigants, Experian, was a party to the arbitration provision, despite the fact that Experian was not a party to the wider agreement that contained the arbitration provision.

Elettra Meeks filed a putative class action against Experian under the Fair Credit Reporting Act. Ms. Meeks entered into a contract for credit monitoring services provided by Experian Consumer Services, an affiliate of Experian. The contract between ECS and Meeks contained an arbitration provision that defined ECS to include affiliates, such as Experian. However, the definition of ECS for purposes of the wider contract, separate and apart from the arbitration provision, did not include affiliates, such as Experian.

The district court found that Experian did not have a right to compel arbitration because it was not a party to the agreement. The Ninth Circuit reversed, relying on U.S. Supreme Court precedent that holds arbitration provisions to be “severable” from the larger contracts that contain them. Based on the precedent, the Ninth Circuit analyzed the parties to the arbitration provision as though it was a standalone contract, even though it was contained within a wider “Terms of Use Agreement.” Because the definition of ECS for purposes of the arbitration provision included its affiliates, Experian was considered a party to the arbitration agreement, irrespective of whether it was a party to the wider contract. Therefore, Experian had the power to compel arbitration.

Meeks v. Experian Information Services, Inc., Nos. 21-17023, 22-15028 (9th Cir. Dec. 27, 2022).

Ninth Circuit Court of Appeals Notes That Review of Arbitration Awards Under the MPPAA is “Notably Less Deferential” than under the FAA

December 9, 2022 by Benjamin Stearns

The Ninth Circuit Court of Appeals recently affirmed in part and reversed in part a district court’s order confirming an arbitration award under the Multiemployer Pension Plan Amendments Act of 1980, noting in the process that judicial review of such awards is “notably less deferential” than review of awards pursuant to the Federal Arbitration Act.

The MPPAA imposes liability on employers who withdraw — partially or completely — from multiemployer pension funds. MNG Enterprises, Inc. withdrew in 2014 from GCIU-Employer Retirement Fund, a multiemployer pension plan. The MPPAA imposes “withdrawal liability” on employers that withdraw from pension plans to cover the employer’s proportionate share of the plan’s unfunded vested benefits and to ensure that such pension plans remain viable. After MNG’s withdrawal from the fund, GCIU’s actuary calculated its withdrawal liability. MNG disputed the actuary’s calculation and initiated arbitration pursuant to the dispute resolution requirements of the MPPAA.

The arbitrator agreed with MNG on two points but ruled for GCIU on the third. Both parties sought judicial review in the federal court for the Central District of California. The district court affirmed the arbitration award except for the interest rate it utilized, because the judge believed the arbitrator made a typographical error. Both parties appealed again, this time to the Ninth Circuit Court of Appeals.

The Ninth Circuit stated that “the standard of review for MPPAA arbitrations is notably less deferential than under the Federal Arbitration Act.” The court presumed that findings of fact made by the arbitrator were correct unless rebutted by a clear preponderance of the evidence, and further, reviewed the arbitrator’s conclusions of law de novo and applications of equitable relief for an abuse of discretion. Applying these standards of review, the Ninth Circuit affirmed in part and vacated in part the district court’s rulings. The court remanded for further consideration as to whether MNG, as a purchaser of earlier withdrawn participants in the GCIU, could have been liable as a successor as a matter of equity, and whether GCIU correctly applied the contribution histories at the time of the relevant asset sales.

GCIU-Employer Retirement Fund v. MNG Enterprises, Inc, Nos. 21-55864, 21-55923 (9th Cir. Oct. 28, 2022).

Schwab Wins Battle Over Confirmation of FINRA Arbitration Award Predicated on Alleged Discovery Abuses

November 9, 2022 by Benjamin Stearns

Charles Schwab & Co. successfully petitioned the Southern District of New York for confirmation of a FINRA arbitration award against one of its account holders, fending off challenges predicated on Schwab’s alleged discovery abuses in the process.

The Evan K. Halperin Revocable Living Trust initiated arbitration against Schwab through FINRA’s dispute resolution office. The trust alleged that certain security features of the schwab.com trading platform caused the trust to be logged out of its schwab.com account without explanation while attempting to execute various options trades. The trust alleged that these unexplained interruptions in service caused approximately $1.5 million in losses for which Schwab was liable. The “key dispute” in the arbitration was whether the trust was logged out due to certain malfunctions or security features internal to schwab.com or whether it occurred due to the computer and systems used by the trust.

The discovery process during the arbitration proceeding was highly contentious. The trust repeatedly filed motions alleging that Schwab was engaging in discovery abuses and refusing to produce certain materials that it alleged were key to its case, chiefly in the form of certain electronically stored information (ESI) that Schwab purportedly maintained related to a “fraud detection system.” Schwab repeatedly denied that it was withholding discovery, going so far as to file a declaration from its director of client authentication stating that no such “fraud detection system” existed. In addition, Schwab produced substantial amounts of other ESI related to a user’s activity and log-on/log-off records. The FINRA arbitration panel ruled in Schwab’s favor and, pursuant to the parties’ arbitration agreement, ordered the trust to pay Schwab’s attorneys’ fees and costs totaling $142,750.

The trust petitioned the district court for vacatur based on its view that the arbitrators had exhibited “evident partiality or corruption” or had engaged in misconduct. Its arguments were principally based on the FINRA panel’s refusal to compel Schwab to produce the ESI that the trust alleged pertained to the fraud detection system maintained by Schwab.

The court found that the FINRA panel did not refuse to hear evidence by not compelling Schwab to produce the ESI sought by the trust, information that did not exist per Schwab’s representation in a declaration executed under penalty of perjury. The court noted that “[t]he Trust provides no evidence beyond the Panel’s denial of several of its motions and Schwab’s ultimate success in the Arbitration to support its claim of the Panel’s ‘evident partiality’ in favor of Schwab.” The court stated that “bias” of an arbitration panel is “not even established by showing that an arbitrator consistently agrees with the arguments of one side and repeatedly finds in their favor. … Fundamental fairness does not mean that a party must win a minimum percentage of motions.”

The trust’s “dissatisfaction with the Panel’s rulings and the Award” did not render the arbitration fundamentally unfair. The court denied the trust’s petition for vacatur and granted Schwab’s cross-petition for confirmation, including the award of fees and costs, and awarded Schwab prejudgment interest at the rate of 9% per annum, based on the presumption in favor of the award of prejudgment interest on a motion to confirm an arbitration award.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 1:21-cv-08098 (S.D.N.Y. Sept. 19, 2022).

Denial of Motion to Compel Arbitration Vacated by Second Circuit Due to Insufficient Record Evidence of Presentment of “Scrollwrap Agreement” to Users

October 21, 2022 by Benjamin Stearns

Nicole Zachman brought a putative class action against the Hudson Valley Federal Credit Union (HVCU) for breach of contract and violation of the federal Electronic Fund Transfer Act, among other claims, based on HVCU’s alleged practice of collecting overdraft or insufficient funds fees on accounts that were not actually overdrawn. HVCU moved to compel arbitration based on an arbitration provision included in the modified account agreement Zachman signed in 2019 when she opened her online account with HVCU. Zachman countered that the account agreement she signed in 2012, when she originally opened her account with HVCU, did not contain an arbitration agreement and further that she was not bound by the arbitration provision added in 2019 because she was never provided notice of its addition.

In response, HVCU argued that Zachman was on “inquiry notice” of the arbitration provision’s inclusion in the 2019 modified account agreement. Under New York law, an offeree who does not have actual notice of contract terms is nevertheless bound by those terms if he or she is on inquiry notice of them and assents to them through conduct. “In determining whether an offeree is on inquiry notice of contract terms, New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. This often turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.” When applied to web-based contracts, the courts “look to the design and content of the relevant interface” to determine if the contract terms were presented to the offeree in a way that would put him or her on inquiry notice of the terms.

Here, the Second Circuit determined that the record was insufficiently developed to permit a determination as to whether the presentment of the arbitration provision to users like Zachman was sufficiently “clear and conspicuous” to put her and other users on inquiry notice. The record contained evidence that the modified account agreement containing the arbitration provision was published on the HVCU website. HVCU customers could access the agreement by searching the HVCU website using its built-in search bar or clicking through the website’s “resources” tab to the “account disclosures” webpage. Users could also obtain a hard copy of the agreement by requesting it be mailed to them or by visiting a brick-and-mortar branch. However, HVCU did not post a notice of the added provisions in its quarterly newsletters or in members’ electronic statements, nor did it provide notice in any other fashion, such as by posting a “banner” notification on its webpage.

When HVCU established its new online banking system in 2019, it required users to first register their accounts. To register, users had to click through various “clickwrap” or “scrollwrap” agreements, including an “internet banking agreement.” The internet banking agreement incorporated the modified account agreement and provided links to it. The modified account agreement included the mandatory arbitration provision at issue.

The district court ruled that HVCU failed to demonstrate that Zachman’s registration for online banking put her on inquiry notice of the arbitration provisions. The court found that HVCU “provides no visual aid or description of any layout or design of the webpages that a user sees when registering for online banking services.” HVCU provided a copy of the internet banking agreement “but did not provide screenshots of the webpage(s) presenting the Internet Banking Agreement to online banking registrants.” Reviewing the copy of the internet banking agreement that had been provided, the court found that the relevant hyperlink and language “appear to be buried” in the agreement and, therefore, that HVCU had failed to establish Zachman was on inquiry notice. As a result, it denied the motion to compel.

The Second Circuit, however, vacated and remanded for further proceedings. The appellate court noted that HVCU did not submit any evidence of how the internet banking agreement was presented to users. “As a result, the district court could not resolve whether Zachman was on inquiry notice because, as it noted, it was unable to assess whether the relevant language and hyperlink are clear and conspicuous.” The district court could not properly engage in the required analysis based on the copy of the internet banking agreement in the record; rather, it was necessary to know “the design and content of the webpage and how the terms were presented.” Because no such evidence was presented by either party, the Second Circuit vacated and remanded for further proceedings to develop the record on this issue.

Zachman v. Hudson Valley Federal Credit Union, No. 21-999 (2d Cir. Sept. 14, 2022).