Contract Interpretation

The Ninth Circuit recently denied a petition for a writ of mandamus seeking to overturn a district court’s decision compelling arbitration. The petition principally argued the arbitration clause was inconspicuous because it was only found in a document that users had to: (1) click a link to access; and (2) then find another document incorporated in the first document on UPS’ website.

Randall Holl filed a putative class action alleging that UPS overcharged him for a package he shipped. UPS responded by moving to compel arbitration. It claimed Holl had enrolled in the UPS My Choice program. In so doing, he clicked a box stating he agreed to, inter alia, the UPS My Choice Service Terms, which could be accessed by clicking a hyperlink next to the checkbox. That hyperlink brought users to a short document that incorporated several other documents but did not mention arbitration. The other documents were not hyperlinked to that page, but could be accessed on UPS’ website. One of the documents incorporated was the UPS Tariff/Terms and Conditions of Service, which was 32 pages in length and contained a mandatory arbitration clause. Holl claimed, inter alia, that these multiple levels of incorporation made the arbitration clause inconspicuous.

The district court disagreed, and Holl petitioned the Ninth Circuit for a writ of mandamus. The court noted that this case “test[ed] the outer limits of what constitutes a ‘reasonably conspicuous'” arbitration provision. The Ninth Circuit nevertheless denied Holl’s petition because the district court’s decision was not clearly erroneous as a matter of law, which was required for Holl to prevail under the strict requirements of a mandamus. Applying California contract law, the court noted that “California courts have deemed analogous incorporations by reference valid.”

The court also noted that UPS had since changed its arbitration disclosure to make it more conspicuous. That was probably wise. While UPS prevailed in this case, the Ninth Circuit noted that the facts stretched the limits of what is conspicuous, and the court’s holding was based on the extraordinary requirements of a writ of mandamus. It is not clear that UPS would have prevailed but for the strict standard of review, and other courts might well disagree with the district court. UPS seems to have recognized as much when it changed its disclosure.

In re Holl, No. 18-70568 (9th Cir. May 30, 2019).

Petitioners, two Rent-A-Center entities, moved to compel arbitration of a lawsuit by Anita Ellis alleging that Rent-A-Center unlawfully terminated her employment for seeking workers’ compensation benefits. At the time she was hired, Ellis signed an arbitration agreement stating that she agreed to arbitrate any claims arising out of her employment and/or termination. In seeking to compel arbitration, Rent-A-Center specifically relied on a “delegation clause” in the arbitration agreement stating that the arbitrator — not any court — shall have exclusive authority to resolve any challenge to the applicability, enforceability, or formation of the arbitration agreement, including on the grounds that it was void, voidable, ambiguous, unconscionable, or in violation of state law. Ellis argued that the delegation clause was: (1) ambiguous and failed to reflect an unmistakable intent to delegate arbitrability issues to the arbitrator; (2) unconscionable under state common law; and (3) invalid for violating a West Virginia statute. The lower court held that the delegation clause was both procedurally and substantively unconscionable and that there was no mutual agreement to arbitrate. It therefore denied Rent-A-Center’s motion to compel arbitration, but the Supreme Court of West Virginia reversed.

With respect to Ellis’ first argument, the court noted that it had previously considered the exact delegation clause at issue here and held that it clearly and unmistakably expressed an intent to delegate arbitrability issues to the arbitrator. It thus rejected Ellis’ contrary argument. The court next rejected Ellis’ argument that the delegation clause was unconscionable or otherwise invalid under common law contract principles and West Virginia statute. Ellis claimed the provision suffered from various “contract of adhesion” characteristics often associated with procedural unconscionability (e.g., unequal bargaining power, “take-it-or-leave-it” terms, and others). The court disagreed, however, finding the failure to read a contract does not relieve a party of its binding effect. And while an arbitration clause generally will not be deemed “unconscionable” absent proof of both procedural and substantive unconscionability, the court found Ellis failed to prove substantive unconscionability nonetheless. The court noted that in order for it to consider Ellis’ delegation clause challenge, 9 U.S.C. § 2 and the “severability doctrine” required her to specifically object to the delegation clause, rather than the arbitration agreement as a whole. Because Ellis’ “statutory violation” argument was directed to the arbitration agreement as a whole, it could not serve as a basis for invalidating the delegation clause on unconscionability grounds.

Rent-A-Center, Inc. v. Ellis, 827 S.E.2d 605 (W.Va. 2019)

McDonnel Group LLC obtained a builder’s risk policy for a construction project on a property located in New Orleans, Louisiana. When the insured was denied coverage, it filed suit seeking damages for breach of contract and breach of the duty of good faith and fair dealing. The insurers responded by filing a motion to dismiss for lack of subject-matter jurisdiction and improper venue, invoking the contract’s arbitration provision under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The policy also contained a “conformity to statute” provision stating, “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” The insured “responded that any obligation to arbitrate under the Convention did not apply to the instant dispute because the policy’s arbitration agreement was, as a matter of law, invalid” as it was contrary to title 22, section 868(A)(2) of the Louisiana Revised Statutes, “which prohibits arbitration agreements in insurance contracts covering property located in the state.” The insured argued the conformity provision “amended” the arbitration provision out of the contract in order to “conform” with Louisiana law.

Relying on Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009), which held that the Convention superseded the Louisiana statute, the district court found that, because the “state statute was preempted by federal law … no conflict existed between the policy and state law so as to trigger the conformity provision of the policy.”

Although Safety National determined the Louisiana statute was preempted by the Convention, the Fifth Circuit now had to determine the impact of the conformity provision. The court held that because the statue does not and cannot apply to the policy, “there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.”

McDonnel Grp., LLC v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. May 13, 2019)

The Third Circuit determined that a former employee’s claim for retaliation against her employer was subject to arbitration per the arbitration clause in her employment agreement, which stated:

Except for actions for specific performance or injunctive relief, if a dispute or claim should arise that does not get resolved through negotiation of the parties, the parties will attempt in good faith to resolve the dispute or claim by mediation administered by the American Arbitration Association (AAA) under its Employment Mediation Rules, before resorting to arbitration.

The court noted that “[i]t does not appear that any federal court has addressed an arbitration agreement with language similar to this one. But in light of the presumption in favor of arbitrability, we think the phrase ‘if a dispute or claim should arise’ is best understood as functionally equivalent to more standard language that would expressly sweep in any claim relating to Dr. Monfared’s employment.”

The Eastern District of Pennsylvania’s decision confirming the arbitration award was affirmed.

Monfared v. St. Luke’s Univ. Health Network, No. 18-2850 (3d Cir. May 10, 2019)