Contract Interpretation

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).

The First Circuit vacated an order compelling arbitration after finding that the arbitrator selection clause was unconscionable. The court nevertheless remanded the case to the district court to determine if the selection clause was severable from the remainder of the arbitration agreement and whether arbitration could therefore proceed. The court also rejected several other challenges to the district court’s arbitration order, including claims based on a forum selection clause, a claim of waiver, and an argument that a statutory claim was not subject to arbitration.

Austin Trout, a boxer from New Mexico, sued the World Boxing Organization (WBO), which is based in Puerto Rico, in New Mexico state court for removing him from the rankings for a certain weight class. The WBO successfully removed the case and had it transferred to the U.S. District Court for the District of Puerto Rico. The WBO then moved to compel arbitration. While its motion was pending, Trout engaged in discovery, which prompted the WBO to do the same. The district court granted the WBO’s motion. It then denied Trout’s motion for reconsideration, which asserted for the first time that the WBO’s discovery precluded arbitration.

Trout appealed, and the First Circuit vacated and remanded.

The court first rejected Trout’s argument that the WBO’s championship regulations precluded arbitration because of a clause allowing claims to be brought in Puerto Rico state or federal court. The regulations contained two clauses. The first, a forum selection clause, provided that claims could only be maintained in Puerto Rico’s state or federal courts. The second, an arbitration clause, provided that “the sole and exclusive remedy for any claim” was an arbitration proceeding through the WBO’s Appeals and Grievance Committee. Trout claimed the former clause rendered the latter clause a nullity. The First Circuit disagreed, concluding that the former clause was more expansive than the latter and that the regulations read as a whole provided that only Puerto Rico courts could hear claims not subject to the arbitration clause.

The court also rejected Trout’s claim that the WBO waived its right to seek arbitration by (1) removing and transferring the case; and (2) engaging in discovery. The First Circuit explained that (1) the WBO did not waive its rights under the forum selection clause to select the forum to have its motion to compel decided; and (2) Trout’s discovery argument was improperly raised because it was first raised in a motion for reconsideration and it was meritless in any event because the WBO’s discovery “was not of a kind or of a scope that made it an abuse of discretion for a district court not to find an implicit waiver based on litigation conduct.”

The First Circuit then rejected Trout’s contention that his claim under the Muhammad Ali Boxing Reform Act was not subject to arbitration. Although the court recognized that Congress can provide that certain statutory claims are not subject to arbitration, the act’s text did not “explicitly preclude[] arbitration” and Trout’s claim therefore failed.

The First Circuit agreed with Trout’s final claim that the WBO’s arbitrator selection provision was unconscionable under Puerto Rico contract law, however. That clause allowed the WBO’s president to designate three arbitrators. Even though the arbitrators could not be members of the WBO’s executive committee, they could, for example, be the president’s “direct aides.” Nevertheless, the First Circuit noted that the WBO’s regulations contained a savings clause that provided that “[i]f any of these Rules are determined to be unenforceable, the balance of these Rules shall remain in full force and effect.” Thus, the court left it to the district court to determine whether that clause allowed arbitration to proceed under a different selection process.

Trout v. Organización Mundial de Boxeo, Inc., No. 19-1068 (1st Cir. July 10, 2020).