Contract Formation

The First Circuit Court of Appeals recently rejected a party’s argument that an arbitration agreement was unenforceable because the contract containing the arbitration clause had been allegedly terminated and superseded. The court explained that arbitration clauses are generally freestanding and survive the termination of a contract, and concluded that the narrow circumstances in which a later agreement might terminate an arbitration clause were not satisfied in this case.

Kara Biller and her mother Joan McKenna sued Brookdale Greenwich Bay, an assisted living facility, for a variety of tort claims related to allegedly inadequate medical treatment McKenna received while she was a resident at Brookdale.

Brookdale moved to compel arbitration under the terms of a “residency agreement” that Biller signed on McKenna’s behalf when McKenna moved into Brookdale.

In response, Biller and McKenna argued, among other things, that the residency agreement and its arbitration clause expired when McKenna was subsequently moved to a new unit within Brookdale and a new implied-in-fact contract was created that superseded the residency agreement.

The district court declined to compel arbitration. The First Circuit reversed.

As an initial matter, the court rejected Brookdale’s argument that the arbitrator should decide gateway issues of arbitrability rather than the court. The residency agreement’s arbitration clause did not establish that such issues were for the arbitrator in clear and unmistakable language.

The court therefore considered Biller and McKenna’s arguments, including their contention that the residency agreement and its arbitration clause were void because the agreement contained a clause allowing either party to terminate the agreement if McKenna had to “be relocated due to [her] health.” The court noted that it was up to the arbitrator, not the court, to interpret that clause to determine what “relocate” meant and whether McKenna’s move within Brookdale qualified as a relocation that triggered that clause.

That did not end the matter, however, because Biller and McKenna argued that no agreement to arbitrate existed because the agreement had terminated when McKenna “relocated.” The court rejected that agreement. It explained that unless an agreement provides otherwise, arbitration clauses are freestanding and severable and that an argument that an arbitration clause is invalid on a ground that affects the entire agreement is generally for the arbitrator to decide. The court also explained that there is a presumption that arbitration clauses survive the underlying contract. There was no evidence that the arbitration clause was not severable in this case.

The court then rejected Biller and McKenna’s other arguments that the relocation had created an entirely new agreement that superseded the residency agreement and its arbitration clause and that the arbitration clause was unconscionable. Although the court noted that parties could extinguish arbitration clauses, there was no evidence that the parties did so in this case by, for example, entering into a new contract that completely covered the same subject matter as the original contract and that was inconsistent with that agreement. Nor was the agreement unconscionable under Rhode Island law, which sets a “daunting” standard for unconscionability.

Biller v. S-H Opco Greenwich Bay Manor, LLC, No. 19-1865 (1st Cir. June 5, 2020).

Vimeo Inc. sought to compel arbitration of putative class claims brought by Bradley Acaley relating to the use of Magisto, a video creation app. Acaley claimed that the app’s use of face-geometry scan technology violated the Illinois Biometric Information Privacy Act (BIPA). The app’s terms of service included a clause providing for binding arbitration of “all disputes, controversies and claims.” However, the terms also provided an “exceptions to arbitration” clause, which excepted claims “related to, or arising from, allegations of … invasion of privacy.”

Acaley first argued that no valid agreement to arbitrate existed because he never “assented to the terms of service.” “Illinois contract law requires that a website provide a user reasonable notice that his use of the site or click on a button constitutes assent to an agreement.” To determine whether a user has received reasonable notice, courts ask “whether the web pages presented to the user adequately communicated all the terms and conditions of the agreement, and whether the circumstances support the assumption that the user received reasonable notice of those terms.” Although the notice was in smaller font and partially obscured at times by pop-up windows, the court found that Acaley received sufficient reasonable notice from the app’s welcome page, which stated, “By continuing I agree to the terms,” where the word “terms” provided a hyperlink to the terms of service. In addition, a second webpage displayed in “smaller but still conspicuous font” the statement, “By starting you agree to our terms and privacy policy.” As such, the parties had formed a valid arbitration agreement.

The court found, however, that Acaley’s claims for invasion of privacy were clearly excepted from the agreement to arbitrate. The court determined that violations of BIPA constitute an “invasion of privacy” as that term was used in the arbitration agreement and that the exception applied to such claims brought by either party, not just Vimeo. Therefore, the court concluded “with positive assurance” that the arbitration agreement did not apply to Acaley’s BIPA claim and refused to compel arbitration.

Acaley v. Vimeo, Inc., No. 1:19-cv-07164 (N.D. Ill. June 1, 2020).

The Western District of Texas had previously concluded that there was no “meeting of the minds” between the parties with respect to arbitration and denied the defendants’ motion to compel arbitration. On appeal, the Fifth Circuit found that the policies and procedures, incorporated by reference into the parties’ agreement, contained conflicting language. The policies and procedures stated that “[i]f mediation is unsuccessful, any controversy or claim arising out of or relating to the Agreement, or the breach thereof, will be settled by arbitration,” while the parties’ agreement contained a jurisdiction and choice-of-law clause, which stated that “[a]ny legal action concerning the Agreement will be brought in the state and federal courts located in Salt Lake City, Utah.” Relying on similar case law from the Tenth Circuit, the Fifth Circuit concluded that the jurisdiction and choice-of-law clause in the agreement signed by the plaintiff was “compelling evidence against an intent to arbitrate breaches of the Agreement.” Given the irreconcilable conflict between the two clauses, and that there was no limiting language in the parties’ agreement suggesting that the jurisdiction and choice-of-law clause only applied to disputes not subject to arbitration, there was no “meeting of the minds” with respect to arbitration.

O’Shaughnessy v. Young Living Essential Oils, L.C., No. 19-51169 (5th Cir. Apr. 28, 2020).

The U.S. District Court for the District of Nebraska recently granted a defendant’s motion to compel arbitration despite a plaintiff’s claims that she had never seen or signed the employment agreement containing the arbitration clause and that the agreement did not cover certain claims and could not be invoked by a defendant who was not a party to the agreement.

Barbara Nelson worked as an assistant manager in a restaurant owned by American Blue Ribbon Holdings LLC. Julie Kunkle was Nelson’s supervisor. Nelson filed a number of claims related to her employment against American Blue Ribbon Holdings and Kunkle, including a defamation claim related to purported statements Kunkle made to restaurant employees and others.

American Blue Ribbon Holdings obtained a stay with respect to Nelson’s claims related to potential bankruptcy proceedings. Kunkle moved to compel arbitration, claiming that Nelson’s claims were within the scope of an arbitration clause Nelson signed when she was hired by American Blue Ribbon Holdings.

The district court granted Kunkle’s request despite Nelson’s claims that (1) she had never signed the employment agreement in question and (2) even if she had, the arbitration clause did not cover her claims against Kunkle, who was not a signatory to the agreement with American Blue Ribbon Holdings.

First, the court rejected Nelson’s “self-serving” affidavit that she had never seen nor signed the arbitration clause. The evidence established that someone had to access the agreement containing the clause via an emailed link sent to Nelson’s email account, enter Nelson’s email address as a username, use Nelson’s zip code as the password, and subsequently enter Nelson’s “address, telephone number, date of birth, Social Security number, gender, marital status, and direct deposit banking information.” The evidence further established that American Blue Ribbon Holdings did not otherwise collect this information and that Nelson signed the agreement again when she started.

Second, the court concluded that Nelson’s claim against Kunkle was within the scope of the arbitration agreement and that Kunkle could invoke that agreement even though she was not a signatory to it. The agreement was broad and covered, among other things, “disputes regarding the employment relationship” brought under certain employment statutes “and all other state statutory and common law claims.” The fact that (1) Kunkle was an agent of American Blue Ribbon Holdings; (2) allowing Nelson to sue Kunkle for employment-related claims covered by the agreement would limit the agreement’s effectiveness; and (3) many of Nelson’s claims against Kunkle were synonymous or intertwined with her claims against American Blue Ribbon Holdings was sufficient for the clause to cover Nelson’s defamation claim, as well as claims that Kunkle violated Nelson’s rights under the Family and Medical Leave Act.

The court therefore stayed Nelson’s action pending arbitration proceedings.

Nelson v. Kunkle, No. 8:19-cv-00329 (D. Neb. Mar. 20, 2020).