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Brendan Gooley

Ninth Circuit Upholds Decision Compelling Arbitration Based on Terms of Use in Hyperlinks

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The Ninth Circuit Court of Appeals recently upheld a decision compelling arbitration based on an arbitration provision in website “terms of use,” even though those terms were in a hyperlink.

In Patrick v. Running Warehouse LLC, a group of consumers brought six putative class actions against online sporting goods retailers after their personal information was exposed in a data breach. When purchasing goods from the defendants’ websites, they had to click a button that said “place order” or “submit order.” Next to that button was a statement that read: “By submitting your order you … agree to our privacy policy and terms of use.” The phrase “terms of use” was a hyperlink that led to the defendants’ terms of use, which contained an arbitration provision.

The defendants move to compel arbitration based on the arbitration provision in the terms of use. The district court granted that motion and the plaintiffs appealed to the Ninth Circuit, which affirmed.

The plaintiffs primarily argued that the websites provided insufficient notice of the arbitration provisions. The Ninth Circuit rejected that argument. It noted that inquiry notice was sufficient as long as “the website provides reasonably conspicuous notice of the terms to which the consumer will be bound; and (2) the consumer takes some action, such as clicking a button or checking a box, that unambiguously manifests his or her assent to those terms.” The court noted that hyperlinks can satisfy that standard as long as they are “displayed in a font size and format such that the court can fairly assume that a reasonably prudent Internet user would have seen it.” The defendants’ hyperlinks satisfied that standard because, for example, the notice was prominently displayed on an uncluttered page, clear and legible, and the “terms of use” hyperlink, colored bright green, was easily distinguishable and clearly clickable, resembling other links on the page.

The Ninth Circuit distinguished those facts from a case in which it recently held that there was insufficient inquiry notice because the “terms and conditions” in that case were printed in a tiny gray font much smaller than surrounding website elements, it was “barely legible to the naked eye.”

The Ninth Circuit also rejected the plaintiffs’ arguments that the arbitration provisions were invalid under California law and that they were unconscionable. The court further held that the parties delegated the question of arbitrability by invoking JAMS’ rules, which provide that arbitrability disputes are for the arbitrator, not the court.

Second Circuit Holds That Refusal to Enjoin Arbitration Is Immediately Appealable, Clarifies Standard for Obtaining Preliminary Injunction Enjoining Arbitration

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The Second Circuit Court of Appeals recently held that a district court’s refusal to enjoin arbitration was immediately appealable because the arbitration agreement was governed by state law rather than the Federal Arbitration Act. The Second Circuit went on to clarify the standard for obtaining a preliminary injunction enjoining arbitration and remanded the case for a determination of whether that standard was met.

The Resource Group International Ltd. (TRGI) and related entities and TRGI’s chairman and director, Muhammad Ziaullah Khan Chishti, entered into a preferred stock purchase agreement with several other entities. The agreement contained an arbitration clause that provided for arbitration in accordance with “the Uniform Arbitration Act as in effect in the State of New York.” Chishti subsequently resigned from TRGI and executed a release agreement with the entities who had signed the stock purchase agreement. The release agreement contained (1) a forum-selection clause designating the state and federal courts in New York as the “exclusive jurisdiction” for any litigation between the parties and (2) a merger clause stating that the release agreement constituted the “entire agreement” between the parties and that it “supersede[d] all prior arrangements or understandings.” The release agreement required Chishti to refrain from commencing litigation or other proceedings against TRGI and others.

Chishti subsequently initiated arbitration against TRGI claiming that TRGI had breached the stock purchase agreement. TRGI then filed suit in the Southern District of New York claiming that Chishti had breached the release agreement. TRGI sought a declaratory judgment that the release agreement superseded the stock purchase agreement’s arbitration provisions and a temporary restraining order and a preliminary injunction staying the arbitration proceedings. The district court denied the preliminary injunction, concluding that TRGI had not shown irreparable harm or a likelihood of success. TRGI appealed.

The Second Circuit first concluded that it had jurisdiction to consider TRGI’s interlocutory appeal. Although Section 16 of the FAA precludes appeals from interlocutory orders refusing to enjoin arbitration subject to the FAA, the Second Circuit explained that the parties to the stock purchase agreement “opted out of the FAA and expressly elected New York state law to govern any arbitration.” New York law allowed for interlocutory appeals from orders refusing to enjoin arbitration.

Turning to the merits, the Second Circuit held that the release agreement did in fact supersede the stock purchase agreement and that TRGI was likely to succeed on its claim on that point. The release agreement also made clear, however, that at least some claims could be arbitrable. The Second Circuit therefore remanded the case to determine whether the instant claims were arbitrable under the release agreement. The Second Circuit also explained that “forced arbitration of inarbitrable claims may constitute irreparable harm when the arbitration is one for which any award would not be enforceable and for which the time and resources expended in arbitration is not compensable by any monetary award of attorneys’ fees or damages.” The Second Circuit instructed the district court to consider that standard on remand.

Resource Group International Ltd. v. Chishti, No. 23-286 (2d Cir. Jan. 22, 2024).

Court Refuses to Compel Arbitration Based on Dissolution of Arbitral Forum

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The U.S. District Court for the Eastern District of Louisiana recently refused to compel arbitration on the ground that the arbitral forum had ceased to exist and that a purported replacement forum was not the same forum and that a party could thus not be compelled to arbitrate there under the terms of an arbitration agreement requiring arbitration in the now defunct forum.

Baker Hughes Saudi Arabia Co. Ltd. contracted with Dynamic Industries Inc., Dynamic Industries International LLC, and Dynamic Industries International Holdings Inc. for materials and services related to an oil and gas project in Saudi Arabia. The agreement included an arbitration clause requiring arbitration with the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA).

Baker Hughes claimed that Dynamic breached the contract and filed suit in the U.S. District Court for the Eastern District of Louisiana. Dynamic moved to compel arbitration pursuant to the arbitration clause. Baker Hughes opposed the motion on the grounds that the government of Dubai had issued a decree abolishing the DIFC-LCIA and replacing it with the Dubai International Arbitration Centre (DIAC). Dynamic responded that the government of Dubai had transferred the assets, rights, and obligations of the DIFC-LCIA to the DIAC and had deemed all arbitration agreements subject to the DIFC-LCIA valid.

The district court denied the motion to compel arbitration. It noted that arbitration is based on consent and that binding Fifth Circuit precedent precluded compelling arbitration where “the agreed upon arbitration tribunal is unavailable or no longer exists.” The court rejected Dynamic’s arguments about the government of Dubai’s transfer and provision, noting that the DIAC was “not the same forum in which the parties agreed to arbitrate” and that the government of Dubai did not have the authority to compel Baker Hughes to arbitrate in a different forum.

Baker Hughes Saudi Arabia Co. v. Dynamic Industries, Inc., No. 2:23-cv-01396 (E.D. La. Nov. 6, 2023).

Tennessee Supreme Court Permits Consideration of Extrinsic Evidence in Dispute About Capacity to Enter Power of Attorney Used to Sign Arbitration Agreement

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The Supreme Court of Tennessee has approved a trial court’s consideration of extrinsic evidence regarding whether an individual with Down syndrome had the capacity to execute a durable power of attorney that his brother used to enter an arbitration agreement on his behalf.

James Welch’s brother David had Down syndrome. James had David execute a durable power of attorney for health care so that James could make health care decisions for David. David subsequently used the power of attorney to admit David to Oaktree Health and Rehabilitation Center LLC, doing business as Christian Care Center of Memphis. James executed an arbitration agreement as part of Christian Care’s admission process. David died several months later and James sought to sue Christian Care for negligence and wrongful death.

Christian Care moved to compel arbitration. In response, James argued that he did not have the authority to sign the arbitration agreement on David’s behalf because David did not have the mental capacity to appoint an agent through the power of attorney. The trial court looked beyond the four corners of the power of attorney over Christian Care’s objections and concluded based on that evidence that David lacked capacity. It therefore denied the motion to compel.

Christian Care appealed and the court of appeals reversed. The court of appeals “held that the trial court erred by considering evidence on whether David had the mental capacity to sign the [power of attorney].” James then appealed to the Supreme Court of Tennessee.

The Supreme Court of Tennessee held that the trial court had properly considered “evidence on the circumstances surrounding execution of the durable power of attorney for health care and whether [David] lacked the requisite mental capacity to sign it.” The court therefore remanded the case to the court of appeals for a determination on whether the evidence outside the four corners of the power of attorney created “clear and convincing evidence that David lacked the requisite mental capacity when he signed the power of attorney for health care.”

Welch v. Oaktree Health & Rehabilitation Center LLC, No. W2020-00917-SC-R11-CV (Tex. Aug. 31, 2023).

Munich Re Prevails in Alabama Reinsurance Dispute

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A federal court recently agreed with Munich Re that it was not obligated to reimburse an insurer for losses and fees the insurer incurred in litigation with its professional liability carrier regarding a bad faith claim stemming from a personal injury suit subject to the reinsurance treaty.

Alabama Municipal Insurance Corp. (AMIC) issued a commercial automobile insurance policy to the town of Woodland, Alabama. A Woodland employee driving a Woodland vehicle was subsequently involved in an accident in which two passengers were seriously injured. The passengers sued Woodland. AMIC defended Woodland against those claims. The passengers obtained jury awards that exceeded AMIC’s applicable policy limits.

The passengers then sued AMIC claiming AMIC acted in bad faith when it failed to settle within policy limits. AMIC tendered the bad faith claim to Scottsdale Insurance Co., which had issued a professional liability errors and omissions policy to AMIC. Scottsdale and AMIC settled the bad faith suit, but Scottsdale then filed a declaratory judgment action seeking a declaration that it had not been obligated to pay any part of the settlement. AMIC counterclaimed for breach of contract and bad faith. Scottsdale prevailed in the declaratory judgment action, AMIC lost on its counterclaims, and Scottsdale obtained its costs and fees.

AMIC requested partial reimbursement for all of this litigation from its reinsurer, Munich Re. Munich Re reimbursed most of the requested sum but concluded that it was not required to reimburse AMIC for AMIC’s costs and fees and Scottsdale’s costs and fees, which AMIC had been ordered to pay, in AMIC’s litigation with Scottsdale (the declaratory judgment action). AMIC sued, claiming that Munich Re was required to reimburse it for those sums as well.

The U.S. District Court for the Middle District of Alabama disagreed with AMIC and held that Munich Re did not owe AMIC any money for AMIC’s losses to Scottsdale.

The district court analyzed the applicable treaties and concluded that Munich Re was “not generally liable for costs that AMIC decided to pay above and beyond its obligations to its insured clients (in this case, Woodland).” AMIC nevertheless maintained that the treaties “obligated AMIC to pursue any other reinsurances or insurances that might inure to Munich [Re]’s benefit, and that this obligation, in turn, further obligated Munich [Re] to reimburse AMIC for th[at] pursuit.” The district court disagreed, noting that the treaty language did not establish any such obligation. Moreover, although “AMIC would have been obligated to reimburse Munich [Re] for any amount of the Woodland settlement that it was able to recover from Scottsdale,” it did not follow (as AMIC claimed) that Munich Re was “obligated to reimburse AMIC for the money it spent while attempting to secure such a recovery.” The treaty did not support that.

This decision was one of several pending disputes between AMIC and Munich Re.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20-cv-00300 (M.D. Ala. Aug. 30, 2023).