Contract Interpretation

In Young v. Grand Canyon University, the Eleventh Circuit Court of Appeals held that the U.S. District Court for the Northern District of Georgia was wrong to compel arbitration of a student’s breach of contract and misrepresentation claims against a university, as federal regulation 34 C.F.R. § 685.300(e)-(f) prohibits a college or university that accepts federal student loan money from enforcing pre-dispute arbitration agreements when a student brings a “borrower defense claim.”

Plaintiff Donrich Young was enrolled in a doctoral degree program at Grand Canyon University in Arizona and took out federal loans to pay for the program. As part of Young’s admissions process, GCU required him to sign a comprehensive arbitration agreement, which stated that any dispute arising from his enrollment would be resolved by binding arbitration.

Young and seven other students filed a class action suit against GCU claiming that GCU misrepresented to students that they could finish a doctoral degree in 60 credit hours — but in reality, GCU designed its program so that finishing in 60 credit hours is unlikely, which then required students to take and pay for additional research continuation courses. Young and the other students asserted claims for breach of contract, intentional misrepresentation, unjust enrichment, and violations of the Arizona Consumer Fraud Act. The district court dismissed the claims brought by all plaintiffs, except Young, on personal jurisdiction grounds.

GCU then moved to compel arbitration pursuant to the agreement Young had signed as part of his admissions application. The district court granted GCU’s motion to compel, holding that Young’s breach of contract, misrepresentation, and statutory fraud claims were not “borrower defense claims” as defined by the federal regulation at issue and, therefore, were not subject to the regulation’s prohibition on pre-dispute arbitration agreements.

The regulation defines “borrower defense claim” as a “claim that is or could be asserted as a borrower defense as defined in § 685.222(a)(5), including a claim other than one based on § 685.222(c) or (d) that may be asserted under § 685.222(b) if reduced to judgment.” The main disagreement between the parties was whether the phrase “including a claim other than” means to include or exclude claims based on section 685.222(c) or (d) — i.e., claims alleging breach of contract and substantial misrepresentation. The district court interpreted the phrase to exclude breach of contract and substantial misrepresentation claims from the regulation’s definition of “borrower defense claim” and ordered Young’s claims to arbitration.

On appeal, the Eleventh Circuit disagreed, finding that the regulation’s definition of “borrower defense claim” includes breach of contract and substantial misrepresentation claims and therefore shields those claims from arbitration. The panel noted that the district court’s interpretation defies common sense, questioning: “Why would a regulation that all acknowledge was designed to protect student-loan borrowers exclude the most basic, heartland claims that they are likely to bring?” The panel also recognized that the district court’s strained interpretation would include non-contract and non-misrepresentation claims only if reduced to judgment, which would render the “if reduced to judgment” aspect of the borrower defense claim protection meaningless. As a result, the panel reversed the district court’s decision.

Young v. Grand Canyon University, Inc., No. 19-13639 (11th Cir. Nov. 16, 2020).

On remand from the U.S. Supreme Court, the Ninth Circuit Court of Appeals considered in Setty v. Shrinivas Sugandhalaya LLP the question whether non-signatories to an agreement may use state law doctrines, such as equitable estoppel, to compel arbitration. Although the Ninth Circuit recognized that non-signatories may have the power to compel arbitration using equitable estoppel under certain circumstances, it ultimately found that the defendant in this particular case was unable to do so.

The underlying case arose from a failed business relationship between two brothers, Balkrishna and Nagraj Setty. While they were in business together, the brothers had personally entered into a partnership agreement that required them to arbitrate disputes related to partnership rights. Eventually, the brothers parted ways, and each brother formed his own company. After Balkrishna Setty and his company (SS Bangalore) brought suit against Nagraj Setty’s company (SS Mumbai) for trademark infringement, SS Mumbai sought to compel arbitration based on the arbitration provision in the brothers’ partnership agreement.

The lower court denied SS Mumbai’s motion to compel, finding that only the brothers (and not their companies) were signatories to the partnership agreement, and Nagraj Setty was not a named defendant in the lawsuit. The Ninth Circuit upheld the lower court’s decision, holding that SS Mumbai could not equitably estop SS Bangalore from avoiding arbitration. SS Mumbai appealed to the Supreme Court.

The Supreme Court remanded the case for further consideration following its recent decision in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, which ruled that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not conflict with domestic equitable estoppel doctrines permitting enforcement of arbitration agreements by non-signatories.

On remand, the Ninth Circuit reaffirmed its earlier decision denying the motion to compel. The court stated that for equitable estoppel to apply in the arbitration context, “it is essential … that the subject matter of the dispute [is] intertwined with the contract providing for arbitration.” The court found that SS Bangalore’s claims against SS Mumbai for trademark infringement were not clearly “intertwined” with the brothers’ partnership agreement providing for arbitration, and thus SS Mumbai, a non-signatory defendant, lacked the power to compel arbitration in this matter.

The Eastern District of Pennsylvania recently compelled arbitration involving a claim by a plaintiff who had not signed a Comcast subscriber agreement on the ground that the plaintiff had used benefits under the agreement and exercised control over the Comcast account. The court held that the plaintiff was therefore equitably estopped from avoiding arbitration.

James Shelton’s father signed up for Comcast and agreed to Comcast’s subscriber agreement, which provided, among other things, that Mr. Shelton’s father was accepting the agreement “on behalf of all persons who use [Comcast’s] Equipment and/or Service(s) at the Premises” (i.e., the Shelton household) and that Mr. Shelton’s father had “sole responsibility for ensuring that all other users understand and comply with the terms and conditions of this Agreement and any applicable policies.” The agreement also contained an arbitration clause.

Mr. Shelton, who lived in the Shelton household, subsequently placed a service call to Comcast in which he acknowledged using Comcast’s services and setting up his account online. Mr. Shelton also “associated his own personal cell phone with the Shelton Household Account.”

Mr. Shelton later filed suit alleging that Comcast and other defendants violated the Fair Credit Reporting Act by “check[ing] his credit report without a permissible purpose.”

Comcast moved to compel arbitration pursuant to the subscriber agreement.

The U.S. District Court for the Eastern District of Pennsylvania granted Comcast’s motion. Applying Pennsylvania law, the court held that Mr. Shelton was “equitably estopped from avoiding the Arbitration Provision” in the subscriber agreement because, even though “other members of [Mr. Shelton’s] household … originally contracted for Comcast’s services,” Mr. Shelton had “sought and obtained benefits under the agreement by … not only using the Comcast services provided under the agreement at the Shelton Household, but also by exercising control over the account.” Mr. Shelton “‘did more than just passively benefit from the services.’”

Shelton v. Comcast Corp., No. 2:20-cv-01763 (E.D. Pa. Jan. 21, 2021).

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).