Brendan Gooley

Ninth Circuit Holds That Arbitration Clause in “Sign-In Wrap Agreement” Is Enforceable

June 6, 2024 by Brendan Gooley

The Ninth Circuit Court of Appeals recently reversed the denial of a motion to compel arbitration after concluding, contrary to the district court’s decision, that a “sign-in wrap agreement” provided conspicuous notice of terms and that an arbitration clause in the terms was therefore enforceable.

Warners Bros. Entertainment Inc. developed Game of Thrones: Conquest, a mobile game that users could download on their phones. To play the game, users had to press a button labeled “play.” That button was directly over a notice informing users that, by pressing “play,” they agreed to the game’s terms of use. The phrase “terms of use” was a hyperlink to the terms. The first paragraph of the terms advised users in all capitals that the terms required “the use of arbitration on an individual basis to resolve disputes” and involved “waiving your right to a jury trial and class action relief.” An arbitration clause was further down in the terms.

A group of plaintiffs sued Warners Bros. for false and misleading advertising. Warner Bros. moved to compel arbitration. The district court denied that request, concluding that the notice of the terms was “insufficiently conspicuous to bind users to them.”

Warner Bros. appealed and the Ninth Circuit reversed and remanded. The court concluded that the terms were “sufficiently conspicuous” under California law. The court found that the “context of the transaction” supported the enforceability of the terms because users downloaded the app to play the game rather than just accessing a website and thus knew that they would be playing the game for extended periods. The Ninth Circuit also concluded that the visual placement of the notice of the terms — immediately under the “play” button — was clear and conspicuous. The Ninth Circuit also rejected the argument that the terms were substantively unconscionable because the arbitration agreement purportedly banned injunctive relief.

Keebaugh v. Warner Bros. Entertainment Inc., No. 22-55982 (9th Cir. Apr. 26, 2024).

Federal Court Rejects Argument That Subsequent Opt-Out of Arbitration Clause Precluded Arbitration

June 4, 2024 by Brendan Gooley

The U.S. District Court for the Northern District of Illinois has rejected an argument that opting out of arbitration clauses precluded arbitration under prior arbitration agreements in a dispute between Uber drivers and Uber.

A group of Illinois Uber drivers sued Uber under the Fair Labor Standards Act and Illinois law claiming that Uber misclassified them as independent contractors. Uber moved to compel arbitration, arguing that the drivers had signed multiple platform access agreements that included broad arbitration clauses. The platform access agreements allowed drivers to opt out of the arbitration clauses if they so chose, however. The drivers had not opted out of one or more of the agreements but, when subsequent platform access agreements were presented to them, had opted out of those. They argued that the subsequent opt-outs precluded Uber from enforcing the earlier agreements to arbitrate. The district court disagreed, citing the plain language of the opt-out provision, which provided: “If you opt out of this Arbitration Provision and at the time of your receipt of this Agreement you were bound by an existing agreement to arbitrate disputes arising out of or related to your use of our Platform and Driver App, that existing arbitration agreement will remain in full force and effect.” The court also concluded that the arbitration clauses were not unconscionable under Illinois law. One of the plaintiffs had previously filed suit and obtained a ruling that he was not required to arbitrate any claims, however. The district court gave effect to that decision under issue preclusion principles.

Agha v. Uber Technologies, Inc., No. 1:23-cv-17182 (N.D. Ill. Apr. 22, 2024).

Ninth Circuit Reverses Denial of Motion to Compel Arbitration

May 13, 2024 by Brendan Gooley

The Ninth Circuit Court of Appeals recently reversed a district court’s decision to deny a motion to compel arbitration in a case involving a request to refund the cost of airline tickets after a cancellation.

Winifredo and Macaria Herrera purchased airline tickets on Cathay Pacific flights through a third-party booking website, ASAP Tickets. ASAP’s terms and conditions included an arbitration clause requiring binding arbitration through the American Arbitration Association. During their trip, Cathay Pacific canceled the Herreras’ return flight and told them to talk to ASAP about a refund. ASAP apparently denied the Herreras’ request for a refund. The Herreras filed suit against Cathay Pacific, which moved to compel arbitration pursuant to ASAP’s terms and conditions. The district court denied Cathay Pacific’s motion, reasoning that the Herreras’ gripe was with Cathay Pacific, not ASAP.

Cathay Pacific appealed, and the Ninth Circuit reversed and remanded. It first rejected the argument that federal regulations precluding arbitration provisions in “contracts of carriage” precluded arbitration in this case, explaining that the regulation in question did not prohibit “airline carriers from enforcing arbitration agreements between passengers and third parties if the applicable law permits them to do so.” The court then held that California contract law allowed Cathay Pacific to invoke ASAP’s arbitration clause because the Herreras’ breach of contract claim was “intimately founded in and intertwined with” ASAP’s terms and conditions. ASAP had effectively acted as a “middleman” for “refund-processing purposes.” The Ninth Circuit then rejected the Herreras’ arguments that it would be unfair to allow Cathay Pacific to invoke the arbitration clause because “the refund process was not clear.”

Herrera v. Cathay Pacific Airways Ltd., No. 21-16083 (9th Cir. Mar. 11, 2024).

District Court Grants Motions to Dismiss Claims Brought by Reinsurer

April 24, 2024 by Brendan Gooley

The U.S. District Court for the Northern District of Texas recently dismissed certain claims brought by a reinsurer related to its efforts to audit an insurer’s broker.

Antares Reinsurance Co. reinsured United Specialty Insurance Co. United Specialty contracted with National Transportation Associates (NTA) to sell United Specialty policies on commission. Antares sought to audit NTA because it suspected it of fraud. A disagreement concerning the terms of the audit ensued, and Antares filed suit against several defendants seeking specific performance of a contractual provision allowing Antares to inspect NTA’s books, asserting various claims, including breach of contract and fraud/fraudulent misrepresentation, and requesting declaratory relief articulating Antares’ rights regarding inspecting NTA’s books.

The district court dismissed Antares’ claims. It found the specific performance claim moot because the defendants “permitted inspection of the relevant books and records” and that “additional” demands for inspection that the defendants had refused were “non-contractual.” The court held that the fraud claims were barred by the economic loss rule, which provides that “malfeasance doesn’t give rise to a fraud claim unless it resulted in damages beyond those recoverable for the contractual breach itself.” The fraud claims, the court held, “resulted in harms indistinguishable from breach of the underlying contract.” Finally, the court held that the request for declaratory relief was duplicative of the breach of contract claims. The defendants did not move to dismiss the breach of contract claim, however, and that claim therefore survived.

Antares Reinsurance Co. v. National Transportation Associates, Inc., No. 4:23-cv-00928 (N.D. Tex. Mar. 20, 2024).

Tax Court Upholds IRS Decision That Premiums Paid to Microcaptive Insurance Companies Did Not Qualify for Tax Deductions

April 22, 2024 by Brendan Gooley

The U.S. Tax Court recently upheld a determination by the IRS that premium payments to certain microcaptives could not be deducted for tax purposes because the premium payments were not actually for “insurance.”

Dr. Sunil S. Patel, who operated an eye surgery center and two research centers, supplemented his businesses’ commercial insurance by purchasing policies from two purported microcaptive insurance companies. Dr. Patel and his wife, Dr. McAnally-Patel, claimed tax deductions for the premiums paid to those microcaptives. The IRS concluded that the premiums could not be deducted and assessed deficiencies and penalties against the Patels.

The Patels challenged the IRS’ determination, but the Tax Court upheld it. The court noted that the Tax Code “does not prohibit deductions for microcaptive insurance premiums,” but “the deductibility of insurance premiums depends on whether the premiums were truly payments for insurance.” To analyze that question, the court examined “four criteria,” whether:

(1) the insurer distributes the risk among its policy holders; (2) the arrangement is insurance in the commonly accepted sense; (3) the arrangement shifts the risk of loss to the insurer; and (4) the arrangement involves insurable risks.

The court found that the microcaptives “fail[ed] to demonstrate risk distribution.” It found a “circular flow of funds,” “no evidence of any arm’s-length negotiations in determining the premiums paid,” and no evidence that the premium “was actuarially determined.”

It also concluded that, “aside from [some] organizational formalities,” the microcaptives “were not operated as insurance companies” in the commonly accepted sense. They “had no employees of their own that performed services” and a separate entity “orchestrated [their] activities so that they appeared to be engaged in the business of issuing insurance contracts.”

The court therefore declined even to consider “whether [the microcaptives’] transactions involved insurance risk or risk shifting.” The Tax Court sustained the IRS’ conclusion that the Patels could not deduct the premiums paid to the microcaptives.

Patel v. Commissioner of Internal Revenue, Nos. 24344-17, 11352-18, 25268-18 (U.S.T.C. Mar. 26, 2024).