Contract Interpretation

The Ninth Circuit affirmed the district court’s order compelling arbitration in a case brought under the Fair Credit Reporting Act (FCRA) and state law, based on the plaintiff’s purchase of Experian’s Credit Score subscription service in 2014. The plaintiff agreed in 2014 to Experian’s terms of use, which included an arbitration provision and a “change-of-terms” provision, specifying that she would be bound to future versions of the contract by continuing to access Experian’s website. In 2018, on the day before the plaintiff filed her lawsuit, the plaintiff accessed Experian’s website, and subsequently argued that she became subject to new contract terms exempting FCRA claims from arbitration.

The Ninth Circuit held that the plaintiff’s claims were arbitrable under the 2014 terms of the contract, and that the 2018 terms did not apply. In order to bind parties to new terms pursuant to a change-of-terms provision, both parties must have notice that the terms have changed and an opportunity to review the changes. The plaintiff did not allege facts sufficient to conclude that this occurred. The court observed that “the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms.”

The Ninth Circuit also held that there was no concern that the 2014 contract required parties to waive their rights to seek public injunctive relief, which would have rendered the agreement unenforceable under California law (the “McGill rule”). Because the 2014 arbitration agreement subjected to arbitration “all disputes to the fullest extent allowed by law,” the court found that the arbitration agreement did not prohibit a plaintiff seeking public injunctive relief in court. The court also found that the McGill rule was inapplicable because the plaintiff failed to allege Article III standing to bring public injunctive relief.

Stover v. Experian Holdings, Inc., Case No. 19-55204 (9th Cir. Oct. 21, 2020).

The plaintiff had filed a class action alleging that DIRECTV made calls to his cell phone in violation of the Telephone Consumer Protection Act. DIRECTV attempted to compel arbitration by relying on an agreement that the plaintiff had signed with AT&T Mobility, which had become an affiliate of DIRECTV subsequent to the formation of the agreement. The agreement included an arbitration clause extending to “all disputes and claims between” the plaintiff and AT&T Mobility, “includ[ing], but … not limited to … claims arising out of or relating to any aspect of the relationship between” them. As defined in the contract, AT&T Mobility also included its “affiliates.”

The Ninth Circuit explained that the proper procedure for interpreting the arbitration agreement at issue was first to determine whether a valid agreement was formed between the plaintiff and the party attempting to compel arbitration, i.e., DIRECTV. Relying on California law, the Ninth Circuit approved the district court’s holding that, at the time of the arbitration agreement, the reasonable expectation of the parties would not have considered DIRECTV to be included as an affiliate of AT&T Mobility. The Fourth Circuit, in contrast, would have determined whether the arbitration agreement was formed between the plaintiff and the party named in the arbitration agreement (AT&T Mobility), and then would have determined whether the scope of that agreement would include the party seeking to compel arbitration (DIRECTV).

The Ninth Circuit supported its view by reasoning that its approach avoids an “absurd result,” which it must avoid under the California rules of contract interpretation. In so doing, the court distinguished the U.S. Supreme Court’s Lamps Plus decision, which held that the “contra proferentem” rule of contract interpretation was preempted by the FAA.

Revitch v. DIRECTV, LLC, Case No. 18-16823 (9th Cir. Sept. 30, 2020).

The United States Bankruptcy Court for the District of Puerto Rico recently rejected a defendant’s arguments that a clause in a Private Purchase and Sale Agreement of Shares and Other Matters was invalid under Supreme Court case law but nevertheless agreed with the defendant’s interpretation of the clause and therefore dismissed the claim against it.

National Promoters and Services, Inc. (“NAPRO”) entered into a Private Purchase and Sale Agreement of Shares and Other Matters (“the Agreement”) with Aseguradora Ancon, S.A. (“Ancon”). Pursuant to the Agreement, Ancon bought certain shares of National Life Insurance Company (“NALIC”) from NAPRO for approximately $2.5 million.

A clause in the agreement (“Clause Four”) provided in part that $300,000 of the purchase price would be deposited in an escrow account “which shall be reserved for nine (9) months in order to guarantee those obligations not reflected in the financial statements as of September 30, 2011, caused to National Life Insurance Company (hereinafter NALIC) by the officers and/or directors of said entity.” Clause Four further provided: “After such nine (9) month period has passed, to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall be returned to NAPRO.”

Ancon did not fund the escrow fund “because it determined the action unnecessary considering their financial strength and also found that there were claims, risks and unknown losses caused by NALIC that surpassed $300,000.” NAPRO subsequently sued Ancon. Ancon defended in part by claiming that Clause Four was not valid under the Supreme Court’s decision in Bangor Punta Operations, Inc. v. Bangor & A.R. Co., 417 U.S. 703 (1974). Bangor Punta was a shareholder derivative action in which the Supreme Court “held that a shareholder may not complain of acts of corporate mismanagement if it acquired its shares from those that participated in the alleged wrongful transactions.” That holding was based on equitable considerations and the fact that the buying party was trying “to recoup a large part of the price they agreed to pay for their shares” and “reap a profit from wrongs done to others.”

The United States Bankruptcy Court for the District of Puerto Rico rejected Ancon’s argument and held that Bangor Punta was inapposite. “Unlike Bangor Punta, in the instant adversary proceeding, Ancon is the defendant to a recovery of monies action based upon a private stock purchase agreement regarding the sale of NALIC stock by NAPRO.” The action was based on an alleged breach of Clause Four and “there [was] no windfall for Ancon for damages sustained by other premised on a shareholder derivative action lawsuit for corporate mismanagement . . . .”

The court also concluded that Ancon’s reliance on the Supreme Court of Puerto Rico’s decision in Multinational Life Insurance Company v. Carlos Benitez Rivera; Edgardo Van Rhyn Soler, et als., 193 D.P.R. 67 (2015), which applied the Supreme Court’s decision in Bangor Punta, was inapplicable because that case was also based on a different factual scenario.

Because Clause Four was not invalid under Bangor Punta and its progeny, the court turned to interpreting that clause. Applying Puerto Rican law regarding the interpretation of contracts. the court concluded: “The reference in [Clause Four] ‘. . . to the extent that all or part of the sum has not been consumed, the balance, if any, of the aforementioned amount of . . . $300,000 shall not be returned to NAPRO’ refers to the balance of the obligations being consumed, not to the actual payment of the obligations which could be anytime in the future depending on the nature and terms of the obligation.” As a result, the court denied NAPRO’s “request for the defendant to pay the retained amount of $300,000 and orders the dismissal of the complaint.”

In re National Promoters and Services Inc., No. 13-00049-ESL (D.P.R. July 2, 2020)

The Eleventh Circuit Court of Appeals recently affirmed the denial of a motion to arbitrate where the appellants were not parties to the agreements containing arbitration clauses. The court also concluded that equitable estoppel did not apply to stop the plaintiffs from opposing arbitration.

A group of plaintiffs sued Herbalife, a global nutrition company that operates through a direct sales network of thousands of distributors, and some of Herbalife’s top distributors in a putative class action. The plaintiffs, who were also Herbalife distributors, claimed they were tricked into spending thousands of dollars to attend “circle of success” events and invest in their Herbalife distribution business by false promises of financial success from the top distributors.

Herbalife and the top distributors moved to compel arbitration. They cited arbitration clauses in the distributor agreements signed by some of the named plaintiffs and argued that the incorporation of Herbalife’s rules of conduct, which Herbalife amended to include an arbitration agreement, in the remaining distributor agreements rendered all the plaintiffs’ claims subject to arbitration. The district court disagreed and also refused to transfer the case to a different venue.

The top distributors appealed. The Eleventh Circuit affirmed the district court’s denial of their motion to compel arbitration. None of the top distributors were parties to the distributor agreements, which were between the plaintiff distributors and Herbalife. The top distributors therefore could not invoke the arbitration clauses. The court also rejected the argument that the district court should have sent the question of arbitrability to an arbitrator. Threshold questions of arbitrability are only questions for the arbitrator if the parties agree to make them so, and in this case there was no agreement between the plaintiff distributors and the defendant top distributors.

The Eleventh Circuit also rejected the top distributors’ argument that the plaintiffs were equitably estopped from opposing arbitration. The plaintiffs’ complaint did not so much as mention a single term from the distributor agreements, which made it difficult to conclude that the plaintiffs relied on those agreements. The agreements were also not so intertwined with the plaintiffs’ claims, which relied on conduct at best one step removed from the agreements, that equitable estoppel applied. The court also concluded that it did not have jurisdiction to review the district court’s decision not to transfer the case to a different venue.

Lavigne v. Herbalife, Ltd., No. 18-14048 (11th Cir. July 29, 2020).

The Third Circuit Court of Appeals has refused to enforce an arbitration agreement because it impermissibly limited claims to those available under tribal law at the expense of federal statutory claims. The court also concluded that the relevant clause could not be severed from the agreement.

Christina Williams and Michael Stermel entered into payday loan agreements that provided that they were subject to and governed by tribal law. The agreements also “limit[ed] disputes to tribal laws and to tribal courts.” The agreements also contained arbitration agreements.

Williams and Stermel sued in federal court on behalf of a putative class for violations of federal and Pennsylvania law, claiming that the agreements charged unlawfully high interest rates. The defendants moved to compel arbitration. The district court denied the defendants’ motion.

The Third Circuit affirmed. It explained “that arbitration is only appropriate so long as the prospective litigant effectively may vindicate his or her statutory cause of action in the arbitral forum” and that “arbitration agreements that limit a party’s substantive claims to those under tribal law, and hence forbid federal claims from being brought, are unenforceable.”

Applying those principles to Williams’ and Stermel’s claims, the court evaluated the loan agreements and concluded that they impermissibly limited claims to tribal law claims. The court rejected the defendants’ argument that the agreements were proper because they allowed borrowers to make claims under “such federal law as is applicable under the Indian Commerce Clause.” The court read the contract differently, as only allowing claims under tribal law, and also concluded that the restriction to the Indian Commerce Clause was improper because it precluded claims under other federal provisions, including a RICO claim asserted by the plaintiffs.

The Third Circuit also concluded that a severability clause did not save the balance of the arbitration agreement “because the prohibited waiver here [was] not severable.” The court concluded that clauses limiting claims to those available under tribal law was an essential term of the contract and that “the arbitration agreement’s clear reference to the exclusive application of tribal law is intertwined with the arbitration process and is central to it.” The court could not enforce arbitration without impermissibly rewriting the contract.

Williams v. Medley Opportunity Fund II, LP, No. 19-2058 (3d Cir. July 14, 2020).