Arbitration Process Issues

This case involves a putative class action filed in federal court in New York in 2015 by Spencer Meyer against Travis Kalanick, the founder of Uber Technologies, Inc., alleging that Kalanick “orchestrated and participated in an antitrust conspiracy arising from the algorithm that [Uber] uses to set prices.” Kalanick did not move to compel arbitration at the outset based on Uber’s arbitration clause, but instead filed a motion to dismiss, which was denied, as well as a motion to reconsider the court’s determination that plaintiff could seek to proceed via class action, which was also denied. Uber then moved successfully to intervene, and moved to compel arbitration, to which Kalanick joined.

The New York federal court denied the motion to compel arbitration, finding that during Uber’s registration/contract formation process, the parties had not actually formed an enforceable agreement, and thus the plaintiff did not agree to arbitrate his claims.

Uber’s contracting process at the time required a potential Uber rider to input contact information and their payment details, and then “register” to form an account. There was text under the “register” button which said “[b]y creating an Uber account, you agree to the Terms of Service and Privacy Policy.” Although the “Terms of Service,” which contained the arbitration clause, and the “Privacy Policy” were hyperlinked, a user could register without clicking the links. Plaintiff said he did not recall the hyperlink or clicking it, which Uber did not contest. Thus, the court found that there was no basis for a claim that plaintiff had “actual knowledge of the agreement.”

In its analysis, the court looked at different types of electronic contract formation. First, it noted that there were “clickwrap” or “click-through” agreements, in which website users are required to click on an “I agree” box after presented with a list of terms and conditions of use. Next, it looked at “browsewrap” agreements, in which a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen, but a user can continue to use the website or services without visiting the page hosting the agreement or even knowing it exists. The court noted that Uber’s agreement was not a clickwrap agreement, which the court stated were “more readily enforceable,” but was more akin to a browsewrap agreement as an Uber user could access Uber’s services without clicking the hyperlink to the page hosting the agreement or even knowing that such an agreement exists. The court also noted that the Uber agreement could be a “sign-in wrap agreement” since a user was allegedly notified of the existence of the “terms of use” when signing in. Ultimately the court noted that these contract formation labels “can take courts only so far” and the issue of whether plaintiff agreed to arbitrate his claims “turns more on customary and established principles of contract law than on newly-minted terms of classification,” and is a fact-specific inquiry. The court, noting that the key question is the conspicuousness of the terms, found that Uber’s account creation process did not provide plaintiff with “reasonably conspicuous notice” of Uber’s User Agreement, including the arbitration clause, or evince “unambiguous manifestation of assent to those terms.” Thus, in light of the facts, the court found that plaintiff did not form an agreement to arbitrate, and denied the motion to compel arbitration.

Meyer v. Kalanick, No. 15 Civ. 9796 (USDC S.D.N.Y. July 29, 2016).

This post written by Jeanne Kohler.

See our disclaimer.

A signatory may bind a non-signatory to an arbitration agreement through principles of contract and agency law such as: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter-ego; and (5) estoppel. A Nebraska federal court held that none of the theories required Plaintiff to arbitrate its claims.

Defendant entered into a reinsurance participation agreement (“Agreement”) with Applied Underwriters Captive Risk Assurance Company (“AUCRA”) which contained an arbitration agreement. A schedule to the Agreement added an additional 22 parties. Plaintiff was not a party to the Agreement. Years later, the defendant executed a promissory note (“Note”) with plaintiff. The Note included the same additional 22 parties as in the “Agreement”. Defendant defaulted on the note, and litigation ensued. Although the complaint initially included a cause of action for breach of the Agreement, it was later amended to include a single cause of action for breach of the Note. The Defendant moved to dismiss or stay the action pending arbitration under the theory that Plaintiff was bound as a non-signatory to the arbitration agreement.

Under the theories of agency and veil-piercing, the Court stated “a corporate relationship is not enough to bind a non-signatory to an arbitration agreement.” It found defendant did not present any evidence AUCRA had actual, implied, or apparent authority to bind Plaintiff to the Agreement or the corporate relationship was sufficiently close or the formalities were disregarded so the corporate veil was pierced or the two entities acted as each other’s alter ego. In fact, Plaintiff was the indirect parent of AUCRA.

Defendant also argued the Agreement was incorporated by reference in the Note. “When determining whether an arbitration provision was incorporated … the new agreement must either incorporate by reference the entire previous contract, or must expressly incorporate the portion containing the arbitration provision.” Here, the Court found the Note neither directly referenced the Agreement, nor incorporated any of its terms – particularly its arbitration provision.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., 8:15CV90 (USDC D. Neb. May 26, 2016), recommendation adopted (June 16, 2016).

This post written by Nora A. Valenza-Frost.

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The California Supreme Court has held that an arbitrator, rather than a court, has the power to decide whether class claims can proceed in arbitration, where the parties’ arbitration agreement is ambiguous on the question.

The background of this case is as follows. When Plaintiff Timothy Sandquist was hired by Defendant Lebo Automotive (“Lebo”), a car dealership, he signed multiple arbitration agreements as a condition of employment. Plaintiff later sued Lebo and its owners, alleging racial discrimination, harassment, and retaliation. The complaint sought to bring claims on behalf of a “class of current and former employees of color.” Defendants filed a motion to compel arbitration based on the arbitration agreements. The trial court granted the motion but struck the class allegations, concluding that the arbitration agreements did not permit class arbitration. On appeal, the California court of appeal reversed in part, ruling (1) the trial court erred in concluding that existing precedent compelled the court to determine whether class arbitration was available; and (2) the availability of class proceedings under an arbitration agreement is for an arbitrator to decide in the first instance. Defendants petitioned for review to the California Supreme Court, contending that the court of appeal’s decision contributed to an existing state and federal split over who should decide whether an arbitration agreement permits class arbitration, and review was granted.

In a closely divided opinion, the California Supreme Court affirmed the court of appeals decision but on different grounds, holding that (1) there is no universal rule as to whether courts or arbitrators should decide the availability of class arbitration, but rather, who decides is in the first instance a matter of agreement with the parties’ agreement subject to interpretation under state contract law (and decided on a case by case basis); and (2) applying state law, that the parties’ arbitration agreement in this case included broad and all-encompassing language requiring an arbitrator to resolve the question of who decides whether class arbitration is permissible. In its analysis, the Court, specifically focusing on the agreements’ terms and resolving any ambiguities in favor of the non-drafting party, noted that the arbitration agreements at issue contained several indications that the parties intended for an arbitrator to decide the class arbitration issue. First, the agreement to submit any claim, dispute, or controversy to an arbitrator suggested a choice to have an arbitrator decide the class arbitration issue. Second, since the agreements give an arbitrator authority to decide any claim connected to employment, the class arbitration question that directly arises from underlying employment claims should be answered by an arbitrator. Third, because Lebo specifically excluded certain claims from the arbitration agreements, it “might well have specified other matters not for the arbitrator, such as the availability of class arbitration at issue here, but did not.” Finally, disagreeing with several federal courts of appeals, the California Supreme Court also held that the Federal Arbitration Act (the “FAA”) does not contain any presumption in favor of a court deciding this issue.

Sandquist v. Lebo Automotive, Inc., No. S220812 (Cal. July 28, 2016).

This post written by Jeanne Kohler.

See our disclaimer.