Arbitration Process Issues

DISTRICT OF ARIZONA AWARDS BROAD FEE AWARD WHERE THERE WERE COMPETING MOTIONS TO CONFIRM ARBITRAL AWARD

August 31, 2016 by John Pitblado

On March 31, 2016, we wrote regarding an arbitration confirmation fight between the Scottsdale Insurance Company (“Scottsdale”) and the John Deere Insurance Company (“John Deere”) in a reinsurance dispute relating to whether there was a computation error in the award’s calculation. Both sides sought confirmation of the arbitral award, but Scottsdale sought to increase the award, alleging a miscalculation. John Deere prevailed in the confirmation fight, and John Deere filed an application for attorneys’ fees and costs. On July 22, 2016, the District Court of Arizona largely granted that application over Scottsdale’s objections.

The reinsurance agreements between the parties provided that if a court confirmed an arbitration award, “the attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.” John Deere sought all of its fees from the confirmation proceeding, including responding to Scottsdale’s motion to modify or correct the arbitration award. Scottsdale opposed the fee request, arguing that John Deere was limited to seeking reimbursement for attorneys’ fees incurred “solely in connection with its cross-motion to confirm the arbitration award.” The Arizona federal court disagreed, finding that the parties’ agreement was not so limited, although the Court reduced a portion of the award sought due to redaction of time entries and failure to comply with a local rule.

Scottsdale Ins. Co. v. John Deere Ins. Co., Case No. CV-15-00671-PHX-PGR (USDC D. Az. July 22, 2016).

This post written by Zach Ludens.

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NEW YORK FEDERAL COURT REFUSES TO ENFORCE ARBITRATION CLAUSE IN INTERNET CONTRACT

August 30, 2016 by John Pitblado

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.

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FEDERAL COURT HAS SUBJECT-MATTER JURISDICTION TO DECIDE PETITION TO COMPEL; DETERMINES PARTY DID NOT WAIVE ARBITRATION BY AGREEING TO MEDIATION

August 23, 2016 by Carlton Fields

Despite a pending motion to compel arbitration in state court, a party (MetLife) petitioned a Tennessee district court under the Federal Arbitration Act for the same relief. As that Act itself does not create federal-question jurisdiction, the court sua sponte looked to the citizenship of the parties and the amount in controversy. Finding both requirements met, and declining to invoke the doctrine of abstention as the respondent requested, the court determined the merits of the parties’ claims. Applying federal law, the court looked at the contract created by the parties’ exchange of emails while the issue of arbitrability was pending before the state court. The pertinent email from MetLife stated that it was agreeable to mediating within 90 days of the state court’s ruling on the arbitration issue. In the Sixth Circuit, a party waives a contractual right to arbitrate by “(1) taking actions that are completely inconsistent with any reliance on the arbitration agreement; and (2) delaying its assertion to such an extent that the opposing party incurs actual prejudice.” MetLife merely expressed its openness to mediation. The respondent also challenged the validity of the arbitration provisions themselves, characterizing them as unenforceable contracts of adhesion, which the court could determine under the Federal Arbitration Act. As the parties agreed that New York law governed the arbitration provisions, the court looked at the elements of adhesion and determined the account application the respondent signed contained enforceable and valid arbitration provisions. As to the account applications respondent directed her MetLife representative to sign, the court reserved a ruling on the issue of agency. Metlife Securities, Inc. v. Holt, Case No. 2:16-cv-32 (USDC E.D. Tenn. July 21, 2016).

This post written by Nora A. Valenza-Frost.

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NINTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION

August 10, 2016 by John Pitblado

In an unpublished decision, the Ninth Circuit recently affirmed a California district court’s denial of a motion to compel arbitration.

The case involves claims brought by a putative class action of exotic dancers under the Fair Labor Standard Act. The defendant SFBSC Management, LLC (“BSC”) made a motion to compel arbitration of the labor claims. The district court denied the motion, and BSC appealed.

The Ninth Circuit held that BSC was not a party to the performer contracts and failed to establish that it has standing to enforce the arbitration clause. BSC argued that alter ego or agency allegations in the complaint conclusively establish its non-party standing for purposes of arbitration. The Court noted that BSC had the burden under the Federal Arbitration Act (the “FAA”) to show the existence of a valid, written agreement to arbitrate and that the agreement to arbitrate encompasses the dispute at issue. The Ninth Circuit stated that while plaintiffs’ complaint contained allegations that BSC acted as “agent” of the nightclubs and that BSC managed the clubs, BSC denied those allegations in its answer, and submitted evidence contradicting plaintiffs’ allegations. Thus, the Court found that under these circumstances, plaintiffs’ allegations in the complaint do not conclusively establish BSC’s standing to compel arbitration. The Court also noted that BSC’s own evidence failed to establish it had a principal-agent relationship with the nightclubs (or vice versa), or that it was an alter ego of the nightclubs. Thus, the Ninth Circuit affirmed the district court’s decision, denying the motion to compel arbitration.

Roes v. SFBSC Management, LLC, No. 3:14-cv-03616 (9th Cir. July 28, 2016).

This post written by Jeanne Kohler.

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DISTRICT COURT OF NEBRASKA DETERMINES NON-SIGNATORY OF ARBITRATION AGREEMENT IS NOT BOUND TO ARBITRATE

August 9, 2016 by John Pitblado

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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