Contract Interpretation

In 2015, the plaintiff was in a car accident that required emergency room medical treatment at Andalusia Regional Hospital. The plaintiff had health insurance at the time through United HealthCare, which maintained a contract for medical services with Andalusia. The plaintiff alleged that in connection with her treatment, Andalusia failed to submit her bills to United HealthCare or follow other required procedures, in violation of the medical services contract. As a third-party beneficiary, the plaintiff filed a class action lawsuit to enforce the terms of the contract and to recover damages incurred as a result of Andalusia’s alleged contractual violations. Andalusia was not named as a defendant in the class action, though the court later joined Andalusia as the sole defendant and dismissed the plaintiffs’ claims against all other parties.

After being added to the lawsuit, Andalusia moved to compel arbitration pursuant to the arbitration clause within the medical services contract between Andalusia and United HealthCare. The plaintiff opposed, arguing: (1) the arbitration clause does not bind her as a third-party beneficiary; (2) Andalusia’s motion to compel arbitration was untimely; and (3) the arbitration agreement was unconscionable. The court dismissed these arguments and granted Andalusia’s motion to compel arbitration.

Finding first that a valid and enforceable arbitration agreement existed between Andalusia and United HealthCare, the court ruled that the arbitration agreement was binding on the plaintiff as a third-party beneficiary. The court found that because a third-party beneficiary stands in the shoes of the signatories to a contract, the beneficiary is bound by the entirety of the contract that he or she wishes to enforce. Put simply, a “third-party beneficiary cannot accept the benefit of a contract, while avoiding the burdens or limitations of that contract.”

With respect to the timeliness argument, the court did not agree with the plaintiffs’ argument that Andalusia failed to initiate arbitration within one year of written notice of the dispute, as provided in the contract. The court noted that the plaintiff, as master of her own complaint, decided not to name Andalusia as a defendant to the lawsuit originally filed in May 2016, and thus there was no actual dispute between the plaintiff and Andalusia that could be arbitrated until the court joined Andalusia in March 2020. Holding otherwise — which would have required Andalusia to preempt the plaintiff and interject itself into the litigation to secure its arbitration rights — would have “absurd results” that conflict with arbitration law and “erode core values of the American legal system.”

Finally, the court found that the arbitration agreement was not unconscionable. The court recognized that whenever parties operate at different levels of sophistication, there is a risk of disparate bargaining power — a requirement to finding the terms of an agreement unconscionable. However, the court reminded the plaintiff that as a third-party beneficiary, she stands in the shoes of United HealthCare, and there were no concerns of equal bargaining power as between United HealthCare and Andalusia.

Aflac recently avoided an attempt by several former employees to invalidate an arbitration agreement on the ground that it constituted an impermissible prospective waiver of the employees’ statutory rights by waiving the purportedly problematic provision in the arbitration agreement.

Several former Aflac sales associates sought to sue Aflac under ERISA and other federal statutes. Aflac filed a petition to compel arbitration. The sales associates opposed the petition on the ground that the arbitration agreement at issue was unconscionable and unenforceable because it constituted a prospective waiver of their right to pursue statutory remedies.

The sales associates specifically cited two provisions in the arbitration agreements between the parties. The first provided that the agreements required “arbitration of ‘any dispute’ between a sales associate and” Aflac. The associates argued that prevented them from bringing their claims in a judicial forum. Another provision in the arbitration agreement, however, limited “the scope of any arbitration to claims for breach of contract, fraud, or willfully tortious conduct.” According to the sales associates, that provision precluded them from asserting their ERISA and statutory claims in an arbitral forum, and the combination of these two provisions was a prospective waiver that precluded them from raising their ERISA and statutory claims at all.

To prevent the agreement from being found to be unenforceable because it contained a prospective waiver, Aflac waived the provision limiting the scope of arbitral claims.

The district court granted Aflac’s petition as a result of Aflac’s agreement to waive the provision limiting the claims that could be arbitrated and the Second Circuit affirmed.

The Second Circuit agreed that Aflac’s waiver removed any prospective waiver problem and noted, in the alternative, that even if Aflac had not waived that provision, the proper remedy under New York law would be to sever the provision and enforce the rest of the agreement.

American Family Life Assurance Company of New York v. Baker, No. 20-1435 (2d Cir. Mar. 1, 2021).

This case arose out of a dispute between the plaintiff and his former employer American National Red Cross for incorrect calculation of lost wages and health insurance premiums.

The plaintiff was hired by the Red Cross in February 2015 and terminated in September 2017. As a member of the Teamsters Local 71 union, the plaintiff brought a grievance against the Red Cross, which was submitted to arbitration pursuant to the collective bargaining agreement between the union and the Red Cross.

After two arbitration hearings in May 2018, the arbitrator awarded the plaintiff reinstatement to his job as well as lost wages and benefits. Months later, the arbitrator clarified her ruling stating that the award included actual overtime earnings before the plaintiff’s termination. The parties agreed on the amounts to be paid in accordance with the arbitration award.

In November 2019, the plaintiff filed a complaint in North Carolina state court alleging that the arbitration award was miscalculated, and the Red Cross owed him additional compensation for additional wages and out-of-pocket medical expenses. The state court dismissed the complaint on the grounds that the arbitrator retained jurisdiction over the subject matter. The plaintiff requested the arbitrator reopen the matter, and the arbitrator subsequently declined to award any additional compensation, since the parties agreed to the terms of the award and the Red Cross had paid accordingly. After another failed attempt at initiating suit in state court, the plaintiff filed a complaint against the Red Cross in the U.S. District Court for the Western District of North Carolina for the incorrect calculation of lost wages and health insurance premiums.

The Red Cross moved to dismiss the complaint. The magistrate judge recommended that the motion be granted, finding that a valid arbitration agreement existed between the union and the Red Cross and that the disputed issue regarding miscalculation of the award was within the scope of the agreement. The magistrate judge also found that the plaintiff was collaterally estopped from pursuing his claim in federal court because, through his union representative, the plaintiff had a full and fair opportunity to pursue his claim under the collective bargaining agreement through arbitration. The magistrate judge emphasized that the arbitrator’s decision was final — she decided in the plaintiff’s favor and refused to reopen the proceeding because the parties agreed on the calculation of the award and the plaintiff actually received the award.

The magistrate judge’s report and recommendation was adopted, and the Red Cross’ motion to dismiss was ultimately granted.

Fonseca v. American National Red Cross, No. 3:20-cv-00526 (W.D.N.C. Feb. 1, 2021), report and recommendation adopted, No. 3:20-cv-00526 (W.D.N.C. Feb. 17, 2021).

In 2012, the plaintiff entered into a cellphone service contract with AT&T Mobility in which she agreed to arbitrate all disputes and claims with AT&T Mobility and its “subsidiaries, affiliates, agents, employees, predecessors in interest, successors, and assigns.” Three years later, AT&T Inc., the parent company of AT&T Mobility, acquired DirecTV, which, unlike AT&T Mobility, provided satellite television service, not cellphone service.

In 2017, the plaintiff sued DirecTV in the U.S. District Court for the Northern District of West Virginia claiming that DirecTV violated the Telephone Consumer Protection Act (TCPA) by calling her cellphone to advertise DirecTV products and services even though her phone number is listed on the National Do Not Call Registry. Recognizing that the plaintiff had never been a DirecTV customer, DirecTV nonetheless moved to compel arbitration, asserting that the dispute was covered by an arbitration agreement in the contract governing the plaintiff’s cellphone service from AT&T Mobility, a DirecTV “affiliate.”

The district court denied DirecTV’s motion to compel arbitration, finding that the plaintiff’s claims did not fall within the scope of the arbitration agreement. DirecTV appealed to the Fourth Circuit, arguing that the plaintiff had signed the arbitration agreement that included AT&T and its “affiliates.” The plaintiff argued that the agreement did not apply to DirecTV despite AT&T Mobility’s acquisition of the company in 2015.

The Fourth Circuit vacated the district court’s decision, finding that the plaintiff formed an agreement to arbitrate with DirecTV and that the dispute fits within the broad scope of that agreement. However, noting the district court’s observation that a construction that does “not so limit the scope of the arbitration clause would be unconscionably overbroad,” the Fourth Circuit remanded the matter to further address unconscionability under West Virginia law.

On remand, the district court once again denied DirecTV’s motion to compel arbitration, holding that the arbitration provision was “overbroad, absurd and unconscionable, and far exceeds anything contemplated by Congress in enacting the FAA.”

The district court determined that the provision was procedurally unconscionable, not only because of the “huge imbalance” between the AT&T conglomerate and the plaintiff who may be somewhat knowledgeable as to the TCPA but unlikely to have expertise in arbitration clauses but also because the provision was a “non-negotiable term” that the plaintiff was not permitted to opt out of or alter if she wanted to obtain AT&T Mobility’s services.

The district court also determined that the arbitration provision was substantively unconscionable because no reasonable AT&T Mobility customer would believe that by signing the arbitration agreement, she was consenting to arbitrate not only with AT&T Mobility but also with any entity that ever might share a corporate umbrella with AT&T Mobility. “[C]onstruing ‘affiliate’ to cover entities like DirecTV would lead to results so absurd that no reasonable person could have intended or anticipated that they would follow from her cell-phone service agreement.”

Mey v. DirecTV, LLC, No. 5:17-cv-00179 (N.D. W.Va. Feb. 12, 2021).

The representative of former stockholders who sold their shares in a leasing corporation pursuant to a stock purchase agreement had filed identical complaints in state court and before an arbitration tribunal alleging a breach of the stock purchase agreement by the bank and seeking an order for specific performance of the contract. The bank removed the case from state court to the U.S. District Court for the Central District of California and then successfully compelled arbitration and obtained dismissal of the case.

On appeal, the Ninth Circuit held that the forum selection clause in the parties’ stock purchase agreement did not waive the right to remove where the clause required litigation to “be brought and determined in Orange County, California,” which is the seat of both state and federal courts. “Because the clause uses the preposition ‘in,’ the contract contemplates federal as well as state courts as proper courts for adjudication.” This contrasts with a 2019 Ninth Circuit case, City of Albany v. CH2M Hill Inc., wherein the relevant forum selection clause waived the right to remove because “there is no federal courthouse located in the designated county.”

The Ninth Circuit also rejected the plaintiff’s argument that the district court erred by compelling arbitration despite a carve-out from the agreement that preserved the ability to seek in court “temporary or preliminary injunctive relief … in aid of arbitration.” The court determined that the plaintiff’s claims were not “in aid of arbitration” because they were not “aimed at preserving the status quo until the dispute may be resolved by an arbitrator.” Rather, the plaintiff’s complaint sought specific performance, a remedy for the defendant’s alleged breach of contract.  Per the parties’ arbitration agreement, only the arbitrator had the power to grant that relief.  The federal district court was correct to compel arbitration.

Meyer v. Fifth Third Bank, No. 19-56506 (9th Cir. Jan. 20, 2021).