Arbitration Process Issues

Ninth Circuit Dismisses Interlocutory Appeal, Finds Order Compelling Arbitration Not a “Final Decision” Under FAA

March 26, 2019 by Alex Silverman

The plaintiff filed a putative class action for alleged violations of California employment law, and the defendant moved to compel arbitration. The district court granted the motion and stayed further proceedings pending a ruling by the arbitrators as to the arbitrability of the dispute. But before submitting the matter to arbitration, the plaintiff voluntarily discontinued the action without prejudice and immediately appealed the district court’s order. The Ninth Circuit dismissed the appeal, however, finding it lacked jurisdiction. The court agreed with the defendant that the plaintiff’s “voluntary discontinuance and immediate appeal” was an impermissible attempt to sidestep the “final-judgment rule, the Federal Arbitration Act’s explicit bar on interlocutory appeals, and prevailing case law.” Because the order compelling arbitration was not a “final decision” under § 16(a) of the FAA, the plaintiff was required to seek the district court’s permission to pursue the appeal, but failed to do so. That he voluntarily discontinued the action before appealing was deemed irrelevant, particularly since the discontinuance was without prejudice.

Gonzalez v. Coverall North America, Inc., No. 17-55787 (9th Cir. Feb. 22, 2019).

English Court Enjoins Washington State Court Action in Favor of Arbitration in London

March 21, 2019 by Benjamin Stearns

In a dispute involving a complex, multilayered excess insurance policy, the Commercial Court of the Queen’s Bench Division enjoined Weyerhaeuser, a Washington company, from suing Catlin Syndicate Limited, a London-based insurer, in Washington based on the parties’ agreement to arbitrate in London.

The “Layer 4 Policy” at the heart of the lawsuit provided that the choice of law and jurisdiction governing disputes under the contract would be “as per Lead Underlying Policy.” Endorsement 7 of the Lead Underlying Policy provided for “any dispute, controversy or claim arising out of or relating to the policy to be determined in London under the Arbitration Act 1996.” However, Endorsement 8 of the Lead Underlying Policy stated that Washington state law governed the policy, and Endorsement 9 provided that Catlin would “submit to the jurisdiction of any court of competent jurisdiction within the United States.” Significantly, however, Catlin’s submission to jurisdiction in the United States was “solely for the purpose of effectuating arbitration.” Therefore, the court held the result was dictated by Endorsement 7, which required the parties to arbitrate disputes in London.

The court gave great weight to the “commercial parties” involved in the dispute, finding that a conflict in drafting “could or should [not] lightly be attributed to commercial parties,” and “struggl[ing]” to see why “commercial parties” would provide for the “unusual” limits on arbitration advanced by Weyerhaeuser.

The court’s ruling was based on English law, but the court found the result would be the same under Washington law, as presented to the court via expert evidence. Although the court recognized that Washington’s adopted policy is “adverse to arbitration,” the court stated that an interpretation of the parties’ contract that “does not work commercially … weigh[s] strongly against” a finding that Washington state policy should alter the parties’ agreement.

Catlin Syndicate Limited v. Weyerhauser Company, No. CL-2018-000292, [2018] EWHC 3609 (Comm) (Dec. 21, 2018).

Non-signatory Third-Party Cannot Enforce Arbitration Clause in Contract

February 21, 2019 by Carlton Fields

SBS is a staffing company that provides personnel to various retail services, such as SPAR. SBS engaged Paradise Hogan (“Hogan”) and assigned Hogan to SPAR. Hogan and SBS entered into an Independent Contractor Master Agreement with SBS (the “Agreement”). The Agreement required the parties to resolve disputes through arbitration; SPAR was not a party to the Agreement. Hogan later sued SBS and SPAR for unpaid wages and benefits and both SBS and SPAR sought to compel arbitration. The district court compelled arbitration as to Hogan’s claims against SBS but denied the motion to compel arbitration as to SPAR. SPAR appealed.

The First Circuit affirmed holding that there was no legal basis to compel Hogan to arbitration where the clear terms of the agreement showed that Hogan did not consent to arbitrate his claims against SPAR. The Court explains that SPAR was not a third-party beneficiary of the Agreement. To determine if a party is a third-party beneficiary a court looks to the specific terms of the contract to ascertain the intent of the parties. Here, the court explained that the clear language of the arbitration clause limited its applicability to the signatories by only covering disputes between “the Parties,” so it is clear that it did not confer arbitration rights to SPAR or any other third party. Moreover, the court determined that Hogan was not equitably estopped from avoiding arbitration of his claims against SPAR. Federal courts have been willing to estop a signatory from avoiding arbitration with a non-signatory when the issues to resolve in arbitration are intertwined with the agreement that the estopped party has signed. The court explained that Hogan’s claims were based upon Massachusetts wage and hour law and not the Agreement and therefore, not sufficiently intertwined.

Hogan v. Spar Group, Inc., No. 18-1286 (1st Cir. Jan. 25, 2019)

Second Circuit Holds Arbitration Clause Found in Hyperlink in a Confirmation Email Unenforceable

February 19, 2019 by Carlton Fields

SquareTrade, Inc. (“SquareTrade”) sells protection plans for consumer products. Adam Starke (“Starke”) purchased a SquareTrade plan from Amazon to cover a CD player ordered from Staples. When Starke’s CD player broke he made a claim for coverage under the protection plan. SquareTrade informed Starke that the CD player was not covered under the protection plan because the plan only applied to products purchased at Amazon. Starke filed this putative class action, seeking to hold SquareTrade accountable for alleged violations of consumer protection laws. SquareTrade moved to compel arbitration, contending that its contract with Starke included an arbitration clause. The arbitration provision first appeared in a “terms and conditions” document provided via hyperlink in a confirmation email sent to Starke after the purchase of the SquareTrade protection plan on Amazon.

The United States Court of Appeals for the Second Circuit affirmed the decision of the district court, holding that the arbitration provision did not become part of the contract because Starke did not have reasonable notice of and manifest his assent to it. The court reached this decision by applying traditional concepts of contract law. The court explained that where an offeree does not have actual notice of certain contract terms, he is nevertheless bound by such terms if he is on inquiry notice of them and assents to them through conduct that a reasonable person would understand to constitute assent. New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. Specifically in the context of web-based contracts, courts look to the design and content of the webpage to determine if the offeree would be put on inquiry notice of such terms.

The court determined that Starke did not have reasonable notice of the arbitration provision which was only in the Post Sale Terms & Conditions (“Post Sale T&C”) provided in the confirmation email. Starke received a chain of confirmation emails from Amazon and then SquareTrade, none of which put him on notice that his “Service Contract” would come in a hyperlink. The email from SquareTrade that contained the hyperlink containing the Post Sale T&C was cluttered and mostly devoted to other information about the details of the protection plan. The email contained diverse text, displayed in multiple colors, sizes and fonts, and features various buttons and promotional advertisement that divert the reader’s attention from the hyperlink. And the hyperlink itself was in small font. The SquareTrade email did not direct Starke to click on the link in any way and did not make him aware that the link contains contract terms to which he would be deemed to agree. The court notes that SquareTrade could have easily included the hyperlink on the Amazon purchase page. Starke had no way to review the Post Sale T&C until after he received the SquareTrade confirmation email.

The court notes that even though SquareTrade provided Starke with 30 days to return the protection plan for a refund, which is in compliance with New York law, there is no justification here for providing contract terms after a transaction. Additionally, the court notes that although Starke had transacted with SquareTrade before, the prior transaction similarly did not give Starke clear and conspicuous notice of the arbitration clause. Therefore, the court held that there was no enforceable agreement to arbitrate.

Starke v. SquareTrade, Inc., No. 17-2474-cv (2d. Cir. Jan. 10, 2017).

Fourth Circuit Compels Arbitration Over “Gateway” Issues Of Arbitrability

February 18, 2019 by Jeanne Kohler

This case involved a consumer, Charleene Novic, who obtained a credit card from Credit One. The card holder agreement contained an arbitration clause that stated “[c]laims subject to arbitration include … disputes related to … enforceability or interpretation of this Agreement.” After Novic accrued a past-due balance, Credit One sold the account to a debt collector. Novic claimed that the past-due balance was the result of fraudulent charges. The debt collector sued Novic in Maryland state court regarding the outstanding balance, and the Maryland court ruled in favor of Novic. Novic then initiated an action against Credit One in Maryland state court, alleging violations of the Fair Credit Reporting Act by failing to conduct a reasonable investigation of her claim that she did not owe the past-due balance. The action was removed to federal court. Credit One moved to compel arbitration under the terms of the card holder agreement. The Maryland district court denied the motion to compel, finding that Credit One lost its right to compel arbitration after it assigned Novic’s account for collection. Credit One appealed to the Fourth Circuit, arguing that an arbitrator should decide the “gateway” issue of whether Novic’s claims are subject to arbitration.

The Fourth Circuit agreed with Credit One. The Court noted that parties may consent to arbitrate the gateway issue of arbitrability, which allows the arbitrator, rather than the courts, to determine the arbitrator’s jurisdiction. The Court, however, noted that any delegation of the issue of arbitrability must be set out in “clear and unmistakable” language in the parties’ agreement. With respect to the arbitration clause at issue, the Fourth Circuit then concluded that it “unambiguously require[d] arbitration of any issues concerning the ‘enforceability’ of the arbitration provisions entered into by the respective parties.” Thus, the Fourth Circuit vacated the Maryland district court’s judgment and remanded to the district court for entry of a stay of court proceedings and for an order compelling arbitration.

Novic v. Credit One Bank, No. 17-2168 (4th Cir. Jan. 4, 2019).