Contract Interpretation

First Circuit Rejects Argument That Arbitration Clause Was Unenforceable Because Contract Containing the Clause Was Allegedly Terminated and Superseded

July 6, 2020 by Brendan Gooley

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agreement was unenforceable because the contract containing the arbitration clause had been allegedly terminated and superseded.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when McKenna was subsequently moved to a new unit within Brookdale and a new implied-in-fact contract was created that superseded the residency agreement.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).

Court Denies Vimeo’s Motion to Compel Arbitration of Purported Class Action Claims Under Illinois Biometric Information Privacy Act

June 22, 2020 by Benjamin Stearns

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).

Court Compels Arbitration With Respect to Insurers, Not Brokers

June 18, 2020 by Brendan Gooley

The U.S. District Court for the Southern District of Texas recently compelled arbitration against insurers but not brokers related to a commercial insurance dispute.

After Hurricane Harvey decimated Houston, an insured sought coverage under its commercial insurance policy. The insurers, several of whom were foreign, denied coverage. The insured filed suit against the insurers based on the denial and an alleged failure to investigate. It also sued the brokers who developed the policy on the theory that the brokers had failed to disclose that the policy contained an allegedly “unique and extremely onerous” arbitration clause.

The insurers and brokers sought to compel arbitration under that clause. The district court granted the insurers’ motion but denied the brokers’ motion and stayed the action.

The court concluded that the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards were met with respect to the insurers and rejected the insured’s argument that the Convention’s exception where the arbitration agreement is “null and void” applied. The insured contended that the arbitration agreement was “unconscionable” under Texas law because it required arbitration to occur in and be subject to the law of New York, set strict limitations on damages, and required the tribunal to comprise senior underwriters or claims handlers. The court explained that the “null and void” exception “is limited to standard breach-of-contract defenses capable of being applied neutrally on an international scale – such as fraud, mistake, duress, waiver, and the like.” There was no evidence of that here.

With respect to the broker defendants, the court noted that they were not signatories to the insurance agreement and its arbitration clause and that non-signatories could compel arbitration in limited circumstances. The court rejected the contention that “intertwined-claims estoppel” applied, explaining that the insured’s complaint did not establish a sufficiently close relationship between the insurers and the brokers for that doctrine to apply. The court also rejected “direct-benefits estoppel,” explaining that the doctrine was not applicable because the insured’s claims against the brokers related to alleged misrepresentations and omissions in the insurance contract’s development and did not assert breaches of the insurance policy. “[N]o interpretation of the insurance policy [was] necessary to adjudicate the misrepresentation claims” against the brokers.

The court nevertheless stayed court proceedings pending completion of the arbitration.

5556 Gasmer Management LLC v. Underwriters at Lloyd’s, London, No. 4:19-cv-00974 (S.D. Tex. May 29, 2020).

New Jersey District Court Rejects Challenge to Arbitration Award on the Basis of Public Policy

June 17, 2020 by Nora Valenza-Frost

The petitioner challenged an arbitration award on the basis that it conflicted with public policy. “[T]he Third Circuit has explained that this exception does not … sanction a broad judicial power to set aside arbitration awards as against public policy.” Thus, the limited public policy exception applies only when “the arbitration decision and award create an explicit conflict with an explicit public policy.” For example, the court referenced numerous situations in which arbitration awards were vacated on public policy grounds where the safety of the general public is implicated, such as vacating an arbitration award that reinstated a pilot who flew while intoxicated or overruling an award that reinstated an employee who violated a public safety regulation at a nuclear power plant. Here, citing various labor laws, the petitioner argued that his employment contract’s forfeiture provision deprived him of wages that he earned based on his performance at Wells Fargo Advisors, and he was prevented from working off his loan obligations because he was discharged without cause. The court found that the petitioner’s dispute was a private contractual relationship between him and Wells Fargo Advisors and did not implicate public policy or public harm.

The petitioner also argued that the panel manifestly disregarded the law, as Wells Fargo Advisors encouraged the panel to resolve the dispute based on “industry practice” instead of the applicable law and that “representations that Wells Fargo Advisors advanced during the proceedings, in conjunction with the [a]ward which it received, raise an inference that the law was ignored.” The court’s review of the record indicated that the panel “was neither encouraged nor directed to disregard the law in resolving the parties’ dispute” and that support for the award can be derived from the terms and provisions of the petitioner’s employment contract.

Lastly, the petitioner argued that the panel excluded certain evidence during the hearings, which would have established that he was discharged from Wells Fargo Advisors without cause. The court found such evidence would have been irrelevant, as the petitioner’s letter offer stated that he was hired on an at-will basis, providing Wells Fargo Advisors a right to terminate the petitioner’s employment at any time, with or without advance notice and with or without cause.

The arbitration award was confirmed.

Caputo v. Wells Fargo Advisors, LLC, No. 3:19-cv-17204 (D.N.J. May 29, 2020).

U.S. Supreme Court Holds Equitable Estoppel Can Allow Non-Signatories to Compel Arbitration Under the New York Convention

June 16, 2020 by Brendan Gooley

The U.S. Supreme Court has held that equitable estoppel doctrines can be invoked by non-signatories seeking to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

ThyssenKrupp Stainless USA contracted with F.L. Industries Inc. to build cold rolling mills at ThyssenKrupp’s steel plant in Alabama. The contracts between ThyssenKrupp and F.L. contained arbitration clauses. F.L. subcontracted with GE Energy Power Conversion France SAS Corp. for motors for the mills. After GE Energy delivered the motors, Outokumpu Stainless USA acquired the plant from ThyssenKrupp. Shortly thereafter, the motors allegedly failed. Outokumpu sued GE Energy, which sought to compel arbitration under the arbitration clauses in the ThyssenKrupp-F.L. contracts.

The district court granted GE Energy’s motion. It concluded that the ThyssenKrupp-F.L. contracts included subcontractors within the definition of the terms “seller” and “parties” and that Outokumpu and GE Energy were therefore parties to the ThyssenKrupp-F.L. contracts. The court therefore declined to reach GE Energy’s alternate argument that the arbitration clauses were enforceable under equitable estoppel principles even if the litigants were not parties.

The Eleventh Circuit reversed. It concluded, in relevant part, that the Convention required parties to sign arbitration agreements, that GE Energy had indisputably not signed the ThyssenKrupp-F.L. contracts, and that GE Energy could therefore not rely on equitable estoppel because that doctrine conflicted with the Convention’s signatory requirement.

The Supreme Court granted certiorari to resolve a circuit split and held that equitable estoppel doctrines can allow non-signatories to compel arbitration under the Convention.

The court explained that chapter 1 of the Federal Arbitration Act (FAA) “permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement” and that the Convention in turn provided that chapter 1 of the FAA applies to proceedings brought pursuant to the Convention’s implementing legislation “to the extent that [chapter 1] is not in conflict with [the implementing legislation] or the Convention.” Thus, the court needed to determine whether applying equitable estoppel principles conflicted with the Convention.

The court concluded it did not. It explained that the Convention was “silent” on the issue and that that “silence [was] dispositive … because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The court also explained that the relevant section of the Convention did not contain exclusionary language stating that arbitration agreements could only be enforced in the circumstances identified. In addition, the Convention “contemplate[s] the use of domestic doctrines to fill gaps in the Convention,” its drafting history supported the conclusion that domestic law could apply, and a majority of the courts of other signatory countries to analyze the issue had concluded that the Convention “does not prohibit the application of domestic law.”

The Supreme Court, therefore, remanded the case to the Eleventh Circuit to consider the merits of GE Energy’s equitable estoppel argument.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048 (U.S. June 1, 2020).