Brendan Gooley

Ninth Circuit Affirms Denial of Motion to Compel Arbitration in Smartphone App Case Based on Obscure “Browsewrap” Arbitration Clause

January 21, 2020 by Brendan Gooley

The Ninth Circuit recently denied a motion to compel arbitration after concluding that an arbitration agreement “buried” in difficult to access terms for a smartphone app did not put users on constructive notice that they were agreeing to arbitration (and a class action waiver).

Huuuge Inc. operated a smartphone application that allowed users to play casino games. Sean Wilson downloaded and played that app for more than a year. Wilson then filed a putative class action alleging that Huuuge violated the state of Washington’s gambling and consumer protection laws by charging users for chips to play the casino games.

Huuuge moved to compel arbitration. It relied on an arbitration agreement and class action waiver in the terms and conditions for the app. The U.S. District Court for the Western District of Washington denied Huuuge’s motion to compel arbitration.

The Ninth Circuit affirmed on appeal. The court explained that a “user would need Sherlock Holmes’s instincts to discover the [t]erms” containing the arbitration agreement. A user could access the terms in two ways. First, before downloading the app, the user could click on a “more” button in the app store, which took the user to a page that discussed the app. The user would then need to scroll down and see a paragraph that began with: “Read our Terms of Use.” Although a “link” was in that paragraph, the user could not click on it. Instead, the user had to copy and paste it into a web browser to access the terms. Second, after downloading the app, the user could click a “three dot ‘kebob’ menu button in the upper right-hand corner of the home page,” which took them to a pop-up menu. The fifth option down on that menu read: “Terms & Policy.” Clicking on that option opened the terms, including the arbitration agreement.

Users were not required to view or assent to the terms and conditions. Thus, the agreement was a classic “browsewrap” agreement, which does “not require the user to take any affirmative action to assent to the website terms.” (In contrast, a “clickwrap” agreement “require[s] users to affirmatively assent to the terms of use before they can access the website and its services.”)

Applying traditional contract law of the state of Washington, the Ninth Circuit concluded that the manner in which Huuuge displayed the arbitration agreement and class action waiver did not put Wilson on constructive notice that he was agreeing to arbitration and a class action waiver. It explained: “Users are put on constructive notice based on the conspicuousness and placement of the terms and conditions, as well as the content and overall design of the app.” Constructive notice did not exist where terms are “buried” or “in obscure corners,” particularly where scrolling to such areas was not required to use the app. Indeed, the Ninth Circuit noted that “[e]ven where the terms are accessible via a conspicuous hyperlink in close proximity to a button necessary to the function of the website, courts have declined to enforce such agreements.”

Huuuge’s terms were not anywhere close to meeting the constructive notice standard.

The court also rejected Huuuge’s claim that Wilson was on actual notice of the arbitration agreement merely because he was “likely” to have viewed the terms at some point because he played the game so much. The court also concluded that Huuuge had waived its request for discovery regarding actual knowledge, noting that Huuuge chose not to pursue such discovery at the outset, instead moved to compel arbitration, and only then sought discovery (and did so insufficiently in a footnote in its reply brief) after moving to compel arbitration.

Wilson v. Huuuge, Inc., No. 18-36017 (9th Cir. Dec. 20, 2019).

Connecticut Supreme Court to Consider Whether Parties Can Use FAA to Extend Time to Vacate Arbitration Award

December 12, 2019 by Brendan Gooley

The Connecticut Supreme Court will consider whether the parties to an arbitration agreement can circumvent Connecticut’s 30-day statutory deadline for filing an application to vacate an arbitration award by including in the arbitration agreement a choice-of-law provision stating that the agreement is governed by the Federal Arbitration Act, which contains a three-month time limitation for filing applications to vacate arbitration decisions.

In A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019), the Connecticut Appellate Court affirmed the trial court’s dismissal of a plaintiff’s application to vacate an arbitration award on the ground that the application was untimely because it was filed more than 30 days after the award. Under a Connecticut statute, “[n]o motion to vacate, modify or correct an award may be made after thirty days from the notice of the award to the party to the arbitration who makes the motion.” The appellate court concluded as a matter of law that parties may not circumvent that statute by agreeing to have the FAA’s three-month limitation period apply. Thus, even though the arbitration agreement at issue provided that “[a]ny arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act … and not by any state law concerning arbitration,” Connecticut’s 30-day limitation applied.

A Better Way Wholesale Autos, Inc. v. Saint Paul, 192 Conn. App. 245 (2019).

Eighth Circuit Rejects Claim That Arbitration Clause in Retainer Was Unconscionable

December 10, 2019 by Brendan Gooley

The Eight Circuit has rejected a plaintiff’s claim that an arbitration clause in a retainer agreement she signed with a law firm after receiving a call from a purported agent of the firm informing her of a purported life-threatening medical condition was unconscionable.

Allegedly, someone acting on behalf of McSweeney Langevin LLC, a law firm, called Jerri Plummer and told her that there was a life-threatening issue with the transvaginal mesh that had previously been implanted in her. The caller also told Plummer that the caller could arrange for Plummer to have the mesh surgically removed and could set Plummer up with an attorney to seek compensation for her surgery. As a result, Plummer signed a retainer agreement with McSweeney Langevin and underwent the surgery. According to Plummer, the surgery was less than successful. She sued an array of defendants, including McSweeney Langevin.

McSweeney Langevin sought to compel arbitration pursuant to the retainer agreement Plummer signed. The district court, applying the law of Washington, D.C., concluded that the arbitration agreement was unconscionable and refused to compel arbitration.

On appeal, the Eighth Circuit reversed and remanded.

The court noted that under D.C. law, an agreement must generally be both substantively and procedurally unconscionable to be unenforceable, but that in an egregious situation, it is sufficient for an agreement to be procedurally unconscionable alone.

With respect to substantive unconscionability, the Eighth Circuit allowed McSweeney Langevin to cure the district court’s finding that the agreement was unconscionable because Plummer could not afford to pay the costs of arbitration by volunteering to pay her costs. The court relied on several federal court decisions applying D.C. law that had similarly allowed litigants seeking to compel arbitration to cure substantive unconscionability by covering costs.

The court therefore turned to procedural unconscionability, noting that Plummer faced an uphill battle to establish that the retainer agreement was unconscionable in light of the fact that it was not substantively unconscionable. On the whole, the Eight Circuit concluded that the retainer was not procedurally unconscionable. The retainer agreement was sent to Plummer more than a month after the initial call she received regarding her mesh. The agreement informed Plummer that she had the “freedom to contract” by bargaining for certain terms in the agreement. The retainer was six pages long (including a nearly full-page signature page) and was easy to read. The fact that it was marked urgent and was sent shortly before Plummer’s surgery was not sufficient, considering all the facts, to render the agreement procedurally unconscionable.

Despite acknowledging that the circumstances that gave rise to this lawsuit were “troubling,” the Eighth Circuit determined that the retainer agreement was not procedurally unconscionable. It therefore reversed the district court’s decision.

Finally, the Eighth Circuit also rejected Plummer’s contention that the retainer agreement was unenforceable because McSweeney Langevin violated ethical obligations by failing to explain the ramifications of the arbitration provision to Plummer. The court assumed that the retainer agreement would be unenforceable if the attorneys have violated ethical obligations, but concluded that no such violations occurred. The agreement informed Plummer of the basic consequences of the arbitration clause. It conspicuously noted, among other things, that Plummer was waiving her right to a jury and a judicial appeal and that arbitration was her only recourse.

Plummer v. McSweeney, No. 18-3059 (8th Cir. Oct 23, 2019).

Court Enforces Arbitration Agreement Incorporated Into “Notice to Employees”

November 19, 2019 by Brendan Gooley

The U.S. District Court for the Northern District of Texas compelled arbitration in a putative Fair Labor Standards Act class action based on language in a “notice to employees” that put the plaintiffs on notice that they were agreeing to arbitrate claims in an incorporated (and hyperlinked) arbitration agreement. The court also rejected various other defenses to arbitration raised by the plaintiffs in an attempt to avoid arbitration.

Cotton Patch Café LLC, a restaurant chain, hired Ian Norred to be a server when he was 17 years old. Cotton Patch also hired Rain Bennett when she was 18 years old. Norred and Bennett signed an electronic document titled “Notice to Employees” that contained a section titled “Arbitration Acknowledgment, Safety Pledge and Receipt” and another section titled “Agreement to Arbitrate.” The latter section provided, among other things: “I agree to use binding arbitration, instead of going to court, for any claims, including any claims now in existence or that may exist in the future” against Cotton Patch. It also referred Norred and Bennett to a hyperlink that read “View Agreement” where they could read the full arbitration agreement. The notice to employees also stated: “By my signature below, I acknowledge that I have received and read (or had the opportunity to read the … [a]rbitration [a]greement. …”

Norred sued Cotton Patch claiming that it had violated the Fair Labor Standards Act by not adequately compensating him and other similarly situated employees. Bennett joined Norred’s suit. Cotton Patch responded by seeking to invoke the arbitration provision. Norred and Bennett claimed that they were unaware of the terms of the agreement and could not have assented to them (because the terms were not in the notice to employees and were accessible by hyperlink). They also claimed that there was no valid agreement to arbitrate because the notice to employees did not indicate that Cotton Patch had offered consideration in exchange for the arbitration clause.

Applying Texas contract law, the Northern District of Texas concluded that a valid contract existed and that the contract included the notice to employees and arbitration agreement. The notice to employees contained sufficient language to incorporate the arbitration agreement by reference. The notice to employees was also clear on that point. The arbitration agreement was also supported by mutual consideration and was mutual, requiring all parties to arbitrate.

The court also rejected Norred and Bennett’s defenses. Norred and Bennett argued, among other things, that the contract was illusory because the agreement to arbitrate was unilateral and because Cotton Patch could unilaterally terminate the agreement. The court rejected that argument, noting that the agreement was mutual and Cotton Patch’s power to terminate the agreement did not apply to claims prior to termination. The court also rejected the argument that the language in the agreement established that it applied only to current employees (Norred and Bennett had previously stopped working at Cotton Patch.) Notably, the court rejected Norred’s argument that he was not bound by the agreement because he signed it while he was underage. Although it was true that a minor could repudiate a contract, he had to do so within a reasonable time after turning 18, which Norred did not do in this case. Finally, the court concluded that the agreement between Cotton Patch and Norred and Bennett was not unconscionable.

Norred v. Cotton Patch Café, LLC, No. 3:19-cv-01010 (N.D. Tex. Oct. 22, 2019).

North Carolina Court Rules Reimbursement for Extracontractual Losses Discretionary

October 28, 2019 by Brendan Gooley

The Court of Appeals of North Carolina has concluded that the state’s Reinsurance Facility has discretion to approve or deny petitions from members for reimbursement for extracontractual losses and that members have no right to reimbursement for such losses under the governing statutory scheme. The decision relates to a significant bad faith case against Allstate.

Allstate issued an auto insurance policy to an insured and ceded the policy to the North Carolina Reinsurance Facility, a nonprofit entity that insures drivers whom insurers determine they do not want to insure individually. The insured subsequently struck a minor riding a bicycle, causing serious injury. The insured reported the accident to the Allstate agent who sold him the policy. She told him to call an Allstate phone number to report the accident, but he never did. Allstate received notice of the accident when it heard from counsel for the injured minor. It investigated and offered to tender the policy limit of $50,000, but the injury party rejected that offer. The insured stipulated to a $13.8 million judgment against him and assigned his claims against Allstate to the injured party. That party then sued Allstate for breaching its duty of good faith and ultimately received $11 million in a settlement after an adverse jury verdict.

Allstate sought reimbursement for the bad faith loss from the Reinsurance Facility. The Reinsurance Facility denied Allstate’s request, and Allstate appealed to the North Carolina Commissioner of Insurance. The Commissioner ordered the Reinsurance Facility to reconsider its denial. The Reinsurance Facility petitioned for judicial review, and the trial court affirmed the Commissioner’s decision.

The Reinsurance Facility then appealed to the Court of Appeals of North Carolina. The court reversed and remanded the trial court’s decision. Analyzing the plain language of the statute governing the Reinsurance Facility, the court concluded that the Reinsurance Facility was required to consider a petition for reimbursement and gave member insurers the right to receive reimbursement for contractual losses, but concluded that members had no right to reimbursement for extracontractual losses and that the Reinsurance Facility had discretion to approve or deny such petitions. Thus, the Reinsurance Facility was well within its statutory rights to deny Allstate’s petition for reimbursement.

The Supreme Court of North Carolina then denied Allstate’s petition for further review.

N.C. Reinsurance Facility v. Causey, 830 S.E.2d 850 (N.C. Ct. App. 2019), review denied, 832 S.E.2d 731 (N.C. 2019).