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Michael Wolgin

Court Denies Vacatur of Zero-Damage Arbitration Award, Finding No Manifest Disregard of the Law

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The case involved a dispute between a medical device manufacturer and a purchaser. The petitioner, Northgate Technologies Inc., alleged that United States Endoscopy Group Inc. breached a requirements contract by purchasing medical devices and supplies from a different manufacturer. U.S. Endoscopy had been purchasing the devices and supplies from Northgate for years, but, in 2021, U.S. Endoscopy began purchasing devices and supplies from a new competing company that had been acquired by its corporate parent. Northgate alleged that this change resulted in nearly $4 million in damages from lost sales.

In February 2024, Northgate filed a demand for arbitration against U.S. Endoscopy, contending that U.S. Endoscopy breached the parties’ agreement. The parties attended an American Arbitration Association commercial arbitration in which the arbitrator found that U.S. Endoscopy’s parent company breached the parties’ agreement. The arbitrator determined, however, that there were no damages for lost profits because, among other reasons, the number of devices that U.S. Endoscopy or its affiliates purchased from Northgate remained consistent throughout the term of their agreement.

In October 2024, Northgate filed a petition in federal court to vacate the arbitration award, contending that the arbitrator exceeded his powers and displayed a manifest disregard of the law (a doctrine recognized in certain circuits, including the Sixth Circuit). The court denied the petition under the Federal Arbitration Act and the Illinois Uniform Arbitration Act. The court explained that, to show manifest disregard, a party must show more than a mere error in interpretation or application of the law. A party must provide evidence that the arbitrators were aware of the relevant law but chose to ignore it.

Here, the court held that section 2-708(2) of the Uniform Commercial Code provided the applicable measure of lost profit damages and that recovery of lost profits in Illinois is allowable if the loss is proved with a reasonable degree of certainty and such profits were within the reasonable contemplation of the parties at the time the contract was entered. The arbitrator considered applicable case law and analyzed whether the breach was reasonably foreseeable at the time of contracting, and rendered his decision based on finding a lack of evidence that met that legal standard. The court therefore found that the arbitrator came to a “legally plausible” conclusion and did not manifestly disregard the law.

The court rejected Northgate’s arguments, which conflated proof of the breach of contract with proof of damages, and which incorrectly contended that the arbitrator erred by considering evidence of historic sales and past profits. The court concluded: “[Northgate] fails to show that the arbitrator manifestly disregarded the law. Instead, [Northgate’s] arguments amount to a general dissatisfaction with the arbitrator’s decision.” Accordingly, the court denied Northgate’s motion to vacate the arbitrator’s award and granted U.S. Endoscopy’s motion to confirm the award.

Northgate Technologies Inc. v. United States Endoscopy Group, Inc., No. 1:24-cv-01885 (N.D. Ohio Apr. 29, 2025).

New York Court of Appeals Upholds Web-Based “Clickwrap” Agreement to Affirm Order Compelling Arbitration, Including Threshold Questions of Arbitrability

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In January 2021, Uber emailed millions of its users informing them that they would be prompted to agree to updated terms of use (available by hyperlinks) in order to continue using the ride-sharing service. The plaintiff, a rideshare passenger who had filed a personal injury lawsuit against Uber in 2020, opened the email on January 15, 2021. When she then logged into the Uber app, she was presented with a pop-up screen including a hyperlink to the terms, a checkbox, bold text confirming that the user reviewed and agreed to the terms, and a “Confirm” button. The plaintiff checked the box and clicked “Confirm.”

Uber’s updated terms of use provided that, by accessing or using Uber’s services, the user confirmed the agreement, and that if the user did not agree, the user could not use the services. The terms also included a prominent warning that the agreement contained an arbitration agreement and that the user acknowledged that he or she read and understood the agreement. The arbitration agreement encompassed “any” personal injury “claim” that accrued prior to acceptance of the updated terms, without exception for claims already pending in court. The agreement also delegated the exclusive authority to the arbitrator to resolve threshold disputes concerning the interpretation or enforceability of the arbitration agreement.

After the plaintiff filed her lawsuit in 2020, Uber did not respond to the complaint. On March 3, 2021, the plaintiff moved for a default judgment. Uber then filed an answer, including an affirmative defense that the plaintiff had agreed to arbitration, and shortly thereafter, Uber sent a notice of intent to arbitrate. The plaintiff opposed arbitration, arguing that the January 2021 arbitration agreement was procedurally and substantively unconscionable, adhesive, and contrary to New York public policy. The plaintiff argued that she never validly agreed to the updated terms and that Uber’s communications with her during the lawsuit about the updated terms violated ethical rules. Uber cross-moved to compel arbitration and to stay the litigation, arguing that its email and pop-up screen put the plaintiff on inquiry notice of the arbitration agreement and that her challenges to the enforceability of the agreement were matters for the arbitrator. The trial and intermediate appellate courts, respectively, granted and affirmed Uber’s cross-motion to compel arbitration and stay the case.

On appeal to the New York Court of Appeals, the state’s highest court, the court concluded that, under the Federal Arbitration Act and state law, Uber’s “clickwrap” process resulted in the formation of an agreement to arbitrate and that the agreement delegated to the arbitrator the exclusive authority to resolve all disputes as to the applicability and enforceability of the agreement. The court observed that it had “not, until now, had the opportunity to offer substantial guidance on the question” but that “state and federal courts across the country have routinely applied ‘traditional contract formation law’ to web-based contracts, and have further observed that such law ‘does not vary meaningfully from state to state.’”

The court agreed with the lower courts’ rulings that, under the objective standard that governs contractual intent, Uber’s communications put the plaintiff on inquiry notice of the arbitration agreement and that the plaintiff assented to that agreement through conduct which a reasonable person would understand to constitute assent. The court rejected the plaintiff’s argument that Uber was on notice that she would not consent to arbitration because she had already filed her claims in court and that Uber’s communications were misleading. The court ruled that these arguments addressed only the enforceability of specific terms of the arbitration agreement, not the agreement’s formation as a whole, and did not address the delegation provision. Accordingly, the issues were for the arbitrator to resolve.

Finally, the court held that the trial court did not abuse its discretion in declining to invalidate the delegation provision or the entire arbitration agreement as a sanction for ethical violations, finding that the record supported the court’s finding that Uber lacked actual knowledge of the pending litigation at the time it solicited the plaintiff’s assent to the updated terms of use.

Wu v. Uber Technologies, Inc., No. 90 (N.Y. Ct. App. Nov. 25, 2024).

Second Circuit Rejects Enforcement of Class Waiver and Arbitration Agreement Under FAA, Finds That Provisions Impermissibly Limited “Plan-Wide” Remedies Under ERISA

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The plaintiff sued the trustee of his retirement plan, his former employer, and others for breach of fiduciary duties in connection with the plan’s purchase of shares of the employer’s parent company for more than fair market value. The plan was a defined contribution plan, with a separate individual account for each participant. The complaint sought relief under section 502(a)(2) of ERISA, including restoration of plan-wide losses, surcharge, accounting, constructive trust, disgorgement of profits, and other equitable relief.

The defendants moved to compel arbitration under the FAA on an individual basis, relying on plan provisions that required participants to resolve any legal claims solely in their “individual capacity and not in a representative capacity” and that prohibited participants from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to” other participants or beneficiaries. The defendants argued that compelling individual arbitration would not limit any substantive rights or remedies that the plaintiff “could personally achieve under ERISA section 502(a)(2),” as the plaintiff could only ever have recovered losses within his individual plan account.

The district court disagreed with the defendants and denied the motion, and a divided panel of the Second Circuit affirmed. The Second Circuit found, over a dissenting judge, that the above provisions were unenforceable because, as the Third, Seventh, and Tenth Circuits found in analogous cases, the provisions would prevent the plaintiff from pursuing remedies under section 502(a)(2) that were, by their nature, plan-wide. Analyzing U.S. Supreme Court precedent, the court explained that “the Section 502(a)(2) vehicle for enforcing Section 409(a) provides for only plan-wide remedies.” If the arbitration provisions prevented the plaintiff from pursuing the statutory plan-wide remedies, then it effectively prevented him from vindicating his substantive statutory rights under ERISA. Consequently, the above plan provisions (and the arbitration agreement as a whole) were unenforceable.

In reaching its decision, the court distinguished Supreme Court rulings, including Epic Systems, Italian Colors, Concepcion, and Gilmer, which enforced arbitration agreements containing a waiver of aggregated actions involving statutory rights. This case was different, the court explained, as precluding a representative action would deprive the plaintiff of the “full range” of statutory substantive rights and remedies. Drawing from another recent Supreme Court case, Viking River Cruises, the court highlighted a “qualitative difference” between waivers of collective action procedures, and waivers that purport to preclude a party from arbitrating in a representational capacity on behalf of a single absent principal (the plan). The court also observed that there would be “no legal way to provide many of the equitable remedies allowed by statute and sought by [the plaintiff] without impacting the accounts of other plan participants and beneficiaries or binding the Plan Administrator and Trustee vis-à-vis other participants.” The court affirmed the denial of the motion to compel arbitration.

Cedeno v. Sasson, No. 21-2891 (2d Cir. May 1, 2024).

Texas Supreme Court Remands Case in Light of Recent Ruling That Arbitrator Must Determine Arbitrability for AAA Arbitration Agreements

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In a lawsuit brought by a car dealership (Lone Star) against a car auction company (Alliance), the latter moved to compel arbitration as a third-party beneficiary of an agreement between Lone Star and a separate company that Alliance used to verify and authorize Lone Star to buy and sell in Alliance’s auctions. Lone Star opposed the motion, contending that its claims fell outside the scope of the arbitration agreement.

After the trial court denied Alliance’s motion to compel arbitration, Alliance appealed to the intermediate court of appeals. That court affirmed, in part premised on its determination that arbitrability is a “gateway issue that courts must decide at the outset of litigation.” (Emphasis added.)

Alliance petitioned the Texas Supreme Court for a review of the denial of arbitration. While the petition was pending, the Texas Supreme Court issued TotalEnergies E&P USA Inc. v. MP Gulf of Mexico LLC, which held that “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” (Emphasis added.) This holding, the court noted, is inconsistent with the holding of the intermediate court of appeals in this case.

The Texas Supreme Court accordingly reversed the intermediate court of appeals’ judgment and remanded the case to the intermediate court of appeals to reevaluate the appeal in light of TotalEnergies. The court deferred to the intermediate court to consider Lone Star’s arguments that this case is distinguishable because, here, (1) the parties agreed to arbitrate under the AAA rules only if they are unable to agree on a different ADR firm and (2) Alliance is not a party to the arbitration agreement but is instead a third-party beneficiary.

Alliance Auto Auction of Dallas, Inc. v. Lone Star Cleburne Autoplex, Inc., No. 22-0191 (Tex. Sept. 1, 2023).

Court Confirms Arbitration Award Against Non-Signatory Intervening Party in Arbitration

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Paychex Inc. had entered into an agreement to provide a company, Dan-Gulf Shipping Inc., with payroll-related services. The agreement contained an arbitration clause governed by the rules of the American Arbitration Association. In 2020, Dan-Gulf commenced arbitration against Paychex under the AAA’s commercial arbitration rules. During the course of the arbitration, Paychex filed a motion to dismiss, but prior to the ruling of the arbitration panel on the motion, another company affiliated with Dan-Gulf, Caytrans BBC LLC, intervened in the arbitration. Paychex then refiled its motion to dismiss to address Caytrans’ claims, which the panel subsequently granted against Caytrans. The panel then entered a partial final award dismissing all of Caytrans’ claims against Paychex (with one of Dan-Gulf’s claims surviving against Paychex).

In September 2020, Paychex filed a petition to confirm the partial final award, to which Caytrans failed to respond. In February 2023, a default was entered against Caytrans. The court has now determined that it is proper for it to enter an order confirming the award. The court found that Paychex demonstrated that diversity subject matter jurisdiction existed over the case. The court also determined that, by electing to intervene in the AAA arbitration, Caytrans consented to the AAA rules, which authorize “that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof.” The court further found that the arbitration was venued, and the partial final award was made, in Rochester, New York, “which is within this judicial district.” Finally, the court determined that the partial final award was valid, there was no “apparent basis for the court not to confirm it,” and the fact that the partial final award “only disposed of the claims between Caytrans and Paychex and not the claims between Dan-Gulf and Paychex is not a barrier to confirmation.” The court therefore confirmed the partial final award.

Paychex, Inc. v. Caytrans BBC LLC, No. 6:22-cv-06411 (W.D.N.Y. July 31, 2023).