Contract Formation

Alabama Supreme Court Reverses Order Compelling Arbitration Based on Failure to Authenticate Arbitration Agreement

April 21, 2020 by Michael Wolgin

A construction company, Parkerson Construction LLC, sued homeowner Jeanne Lacy Oaks claiming that Oaks owed it more than $50,000 for construction work on her home. Oaks filed a counterclaim alleging that Parkerson misrepresented itself and performed deficient work. Parkerson moved to compel arbitration on Oaks’ counterclaim based on an arbitration provision in a September unauthenticated work authorization agreement that was attached to the motion. The trial court granted Parkerson’s motion and compelled arbitration.

On appeal, the Alabama Supreme Court reversed the trial court’s order, concluding that Parkerson failed to meet its evidentiary burden, akin to the evidentiary burden on a motion for summary judgment, to demonstrate that an arbitration agreement existed between it and Oaks. The Alabama high court rejected Parkerson’s reliance on federal case law that, Parkerson argued, permitted trial courts to consider, “for summary-judgment purposes, evidence that is not submitted in admissible form.” The Alabama court noted that the federal case law, which was not binding on it, also held that a challenge to the admissibility of evidence created a burden “on the proponent to show that the material is admissible as presented or to explain the admissible form that is anticipated” at trial. In this case, the court held, Oaks attacked the authenticity of the September 2015 agreement, but Parkerson did not demonstrate that the agreement was or could be admissible. Parkerson had “more than four months between Oaks’s initial assertion that the September 2015 agreement was not authenticated and the hearing on its motion to compel arbitration, during which it could have placed into evidence an authenticated copy of the September 2015 agreement. Parkerson failed to do so. Therefore, the September 2015 agreement was never properly before the trial court, leaving the court without any basis for granting Parkerson’s motion to compel arbitration.”

Oaks v. Parkerson Construction, LLC, No. 1171193 (Ala. Feb. 28, 2020).

District Court Compels Arbitration for Claims Against Supervisor Despite Plaintiff’s Claims Regarding Never Seeing or Signing Agreement Containing Arbitration Clause

April 16, 2020 by Brendan Gooley

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).

Court Upholds Arbitration Provision Despite Allegations of Fraud in Contract’s Execution

March 10, 2020 by Michael Wolgin

The dispute involved the potential trade-in of a car and the purchase of a pickup truck by two customers at a car dealership. During the course of the transaction, one of the customers signed a document that he later learned was a contract including an arbitration provision. Before the transaction was completed, the customers had second thoughts and requested the return of their trade-in and deposit. The dealership refused, insisting that the customers had a binding contract to buy the truck. The customers sued the dealership and certain employees, alleging common law fraud and violations of state consumer protection laws. The defendants moved to dismiss and compel arbitration.

The court granted the motion to compel arbitration and stayed the case. As to the customer who signed the contract containing the arbitration provision, the court found that, although the customer contended that he was deceived into signing the contract, the arbitration provision would be enforced. The provision included a delegation of issues involving arbitrability to the arbitrator. Upon review of New Jersey and federal case law, the court held that unless a plaintiff challenges the validity of the arbitration provision itself, the dispute over the validity of the contract as a whole must be arbitrated. The court found that “precedent compels only one conclusion,” namely, that the arbitrator must decide the validity of their sales contracts and the arbitrability of the dispute.

The court also rejected the argument that the court should permit discovery on the issue of whether the signing customer was fraudulently induced into signing the contract. The court observed, “Importantly, [the customer] is arguing he was fraudulently induced into entering the entire contract, and not just the arbitration provision. A challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court.”

Last, the court stayed the second customer’s claims that were not subject to arbitration because if “the arbitrator finds that the contract, including the arbitration agreement, is invalid, then he will likely return to litigate in this Court, where his action is stayed. In the event that this occurs, it would be sensible for [the two customers] to litigate their claims together, as they initially attempted to do, to avoid inconsistent rulings.” The court therefore stayed the entire case.

Lomonico v. Foulke Management Corp., No. 1:18-cv-11511 (D.N.J. Feb. 20, 2020).

Ninth Circuit Affirms Denial of Motion to Compel Arbitration in Smartphone App Case Based on Obscure “Browsewrap” Arbitration Clause

January 21, 2020 by Brendan Gooley

The Ninth Circuit recently denied a motion to compel arbitration after concluding that an arbitration agreement “buried” in difficult to access terms for a smartphone app did not put users on constructive notice that they were agreeing to arbitration (and a class action waiver).

Huuuge Inc. operated a smartphone application that allowed users to play casino games. Sean Wilson downloaded and played that app for more than a year. Wilson then filed a putative class action alleging that Huuuge violated the state of Washington’s gambling and consumer protection laws by charging users for chips to play the casino games.

Huuuge moved to compel arbitration. It relied on an arbitration agreement and class action waiver in the terms and conditions for the app. The U.S. District Court for the Western District of Washington denied Huuuge’s motion to compel arbitration.

The Ninth Circuit affirmed on appeal. The court explained that a “user would need Sherlock Holmes’s instincts to discover the [t]erms” containing the arbitration agreement. A user could access the terms in two ways. First, before downloading the app, the user could click on a “more” button in the app store, which took the user to a page that discussed the app. The user would then need to scroll down and see a paragraph that began with: “Read our Terms of Use.” Although a “link” was in that paragraph, the user could not click on it. Instead, the user had to copy and paste it into a web browser to access the terms. Second, after downloading the app, the user could click a “three dot ‘kebob’ menu button in the upper right-hand corner of the home page,” which took them to a pop-up menu. The fifth option down on that menu read: “Terms & Policy.” Clicking on that option opened the terms, including the arbitration agreement.

Users were not required to view or assent to the terms and conditions. Thus, the agreement was a classic “browsewrap” agreement, which does “not require the user to take any affirmative action to assent to the website terms.” (In contrast, a “clickwrap” agreement “require[s] users to affirmatively assent to the terms of use before they can access the website and its services.”)

Applying traditional contract law of the state of Washington, the Ninth Circuit concluded that the manner in which Huuuge displayed the arbitration agreement and class action waiver did not put Wilson on constructive notice that he was agreeing to arbitration and a class action waiver. It explained: “Users are put on constructive notice based on the conspicuousness and placement of the terms and conditions, as well as the content and overall design of the app.” Constructive notice did not exist where terms are “buried” or “in obscure corners,” particularly where scrolling to such areas was not required to use the app. Indeed, the Ninth Circuit noted that “[e]ven where the terms are accessible via a conspicuous hyperlink in close proximity to a button necessary to the function of the website, courts have declined to enforce such agreements.”

Huuuge’s terms were not anywhere close to meeting the constructive notice standard.

The court also rejected Huuuge’s claim that Wilson was on actual notice of the arbitration agreement merely because he was “likely” to have viewed the terms at some point because he played the game so much. The court also concluded that Huuuge had waived its request for discovery regarding actual knowledge, noting that Huuuge chose not to pursue such discovery at the outset, instead moved to compel arbitration, and only then sought discovery (and did so insufficiently in a footnote in its reply brief) after moving to compel arbitration.

Wilson v. Huuuge, Inc., No. 18-36017 (9th Cir. Dec. 20, 2019).

California Court Finds Arbitration Agreement Invalid and Unenforceable as a Result of Economic Duress and Undue Influence

November 20, 2019 by Nora Valenza-Frost

The plaintiff, an agricultural laborer, brought suit against his employer who, in turn, moved to compel arbitration based on the arbitration agreement in the parties’ employment contract. The plaintiff opposed, successfully arguing that the arbitration agreement should not be enforced because of economic duress and undue influence.

The court found that all the elements of economic duress were met: (1) a sufficiently coercive wrongful act on the part of the defendant (the arbitration agreement was provided to the plaintiff after he had arrived in California and living in employer-controlled housing); (2) no reasonable alternative on the part of the plaintiff (the plaintiff was in possession of an H-2A visa obtained with the help of the defendants, believed he was only permitted to work for the defendants and had already begun working for the defendants); (3) knowledge of the plaintiff’s economic vulnerability (the defendants acknowledged that employees like the plaintiff often were the sole financial earners in their families); and (4) actual inducement to contract (the plaintiff was in a challenging financial situation with very few financial resources available to him, and no reasonable worker in his shoes could have refused to sign the arbitration agreement).

The court also found that a number of factors suggestive of undue influence were present. Such factors include: (1) discussion of the transaction at an unusual or inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demand that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the use of multiple persuaders by the dominant side against a single servient party; (6) absence of third-party advisers to the servient party; or (7) statements that there is no time to consult financial advisers or attorneys. Here, the plaintiff was presented with the arbitration agreement during a new-hire orientation in a hotel parking lot, at the end of the workday, where he was given no place to sit. Further, evidence was presented that the defendants made insistent demands that the signing of the contracts be completed rapidly, without time to review them, and repeatedly emphasized the negative consequences of failing to comply with the rules. Accordingly, the arbitration agreement was found to be invalid and unenforceable, and the defendants’ motion to compel arbitration was denied.

Martinez-Gonzalez v. Elkhorn Packing Co., No. 3:18-cv-05226 (N.D. Cal. Oct. 29, 2019).