Contract Interpretation

Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).

Noting the court was deciding, as a matter of first impression, “what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating this challenge,” the Ninth Circuit Court of Appeals, in Bielski v. Coinbase Inc., reversed a district court order that denied defendant Coinbase’s motion to compel arbitration.

Coinbase is an online cryptocurrency exchange. Plaintiff Abraham Bielski maintained an account, or “digital wallet,” with Coinbase that allowed him to store and transfer cryptocurrency in and out of his account. Before opening his account, Bielski was required to accept Coinbase’s user agreement, which included a three-step process to resolve any disputes: (i) an “informal complaint process,” which involved contacting Coinbase and attempting to resolve the dispute amicably; (ii) a “formal complaint process” involving a written complaint; and (iii) arbitration of the dispute pursuant to an arbitration agreement. The arbitration agreement included a “delegation provision” providing that disputes arising out of the agreement including the “enforceability, revocability, scope, or validity” of the agreement were delegated to the arbitrator.

Shortly after opening his account, a dispute arose involving an unauthorized transfer from Bielski’s digital wallet. Bielski “live chatted” with company representatives, called the company hotline, and wrote two letters requesting help to recover his funds. He then filed a lawsuit under the Electronic Fund Transfer Act and Regulation E alleging Coinbase failed to investigate the unauthorized transfer of funds from his account. Coinbase moved to compel arbitration of the claims under the user agreement. The district court denied the motion to compel concluding the arbitration agreement and the delegation provision were “inseverable” and unconscionable.

On appeal, Bielski argued that the delegation provision and the arbitration agreement were unconscionable and unenforceable. The court first addressed what a party must do to challenge a delegation provision, and what a court may consider in evaluating the challenge. Coinbase argued on appeal that Bielski did not do enough to challenge the delegation provision. The court rejected this argument, concluding that by specifically objecting to the delegation provision in his opposition to the motion to compel, Bielski sufficiently challenged the provision. The court noted its approach was consistent with decisions in the Second, Third, and Fourth Circuits, but contrary to the approach in the Sixth and Eleventh Circuits, which require a party to provide “more substance in their delegation provision challenge.” The court then addressed what a court may consider in evaluating the challenge, concluding that “a court must be able to interpret that provision in the context of the agreement as a whole, which may require examining the underlying arbitration agreement as well.” Finally, the court rejected Bielski’s argument that the delegation provision was unconscionable, held that the district court erred in refusing to enforce the delegation provision, and reversed the order denying Coinbase’s motion to compel arbitration.

Bielski v. Coinbase, Inc., No. 22-15566 (9th Cir. Dec. 5, 2023).

In Payne v. Savannah College of Art and Design Inc., the Eleventh Circuit Court of Appeals affirmed a district court order denying a motion to compel arbitration of plaintiff Isaac Payne’s discrimination-based claims. The court found the mandatory arbitration agreement in Payne’s underlying employment agreement was fair, and not unconscionable, and defendant Savannah College of Art and Design (SCAD) did not waive its right to arbitrate with Payne.

Payne was hired by SCAD in August 2015 as the school’s head fishing coach. Among the documents that Payne signed as part of the new hire process was a “staff handbook acknowledgment,” which provided that Payne agreed to “comply with the policies contained in the handbook, including the Alternative Dispute Resolution Policy and Agreement.” The staff handbook also stated the school’s alternative dispute resolution policy and agreement was binding on the parties. The agreement included a dispute resolution process including arbitration in the event either party brought a claim. Payne did not dispute he signed the staff handbook acknowledgment.

After he was terminated from his position, Payne brought discrimination and retaliation claims against SCAD in federal court, alleging he was fired for reporting “race-based abuse and threats by white student-athletes to SCAD leadership.” SCAD filed a motion to dismiss the complaint and to compel arbitration. Payne opposed the motion, arguing the arbitration agreement was unconscionable for several reasons, including the cost-shifting provision that negatively impacted his rights, the process for selecting arbitrators limited the potential arbitrators to two white men, and the agreement included a confidentiality provision. Payne also argued SCAD waived its right to compel arbitration when it allegedly sought to settle claims with a student who raised similar complaints to SCAD leadership and had withdrawn from the team, and sought limited discovery related to that issue. The magistrate judge issued a report and recommendation that SCAD’s motion to dismiss and compel arbitration should be granted, which was adopted by the district court.

The Eleventh Circuit affirmed the district court’s order finding the fee-shifting provisions included in the arbitration agreement did not make it unconscionable. The court addressed precedent in the circuit confirming that to establish the arbitration’s fee-shifting provision was unconscionable, Payne would have to provide evidence of “(1) the amount of fees he is likely to incur and (2) his inability to pay those fees.” The court concluded Payne could not establish these facts and further rejected Payne’s arguments that the terms that controlled the arbitrator selection process were contradictory. The court also rejected Payne’s contention that SCAD waived its right to arbitrate, concluding: “We have never held that a party waives its right to arbitrate based on its actions taken in a previous legal action — especially when that party did not bring the lawsuit at bar and has repeatedly insisted that arbitration is the proper dispute resolution channel.” The court affirmed the order of the district court dismissing the action and compelling arbitration.

Payne v. Savannah College of Art & Design, Inc., No. 22-11556 (11th Cir. Aug. 31, 2023).

The Nevada Supreme Court recently reversed the denial of a motion to compel arbitration, explaining that the plaintiff’s arguments that the contract at issue was illegal were not a valid basis to deny arbitration because those arguments did not challenge the validity of the arbitration clause or delegation clause specifically, as is required to preclude arbitration.

Several individuals sued a company that operates the Uber app, including Uber’s Uber Pool feature. They claimed that Uber Pool was operating in Nevada illegally, without required licenses.

The company, Rasier LLC, moved to compel arbitration under the Uber app’s terms of service. The district court denied that motion, holding that the Federal Arbitration Act did not apply and that the terms of service were void in light of the allegations that Uber Pool was operating illegally.

The Supreme Court of Nevada reversed. It noted that “the FAA applies to contracts evidencing a transaction involving interstate commerce” and that the FAA therefore applied here. The court also noted that a party must challenge an arbitration clause itself, not the validity of a contract generally, to avoid arbitration. The plaintiffs only “generally challenge the Terms of Service and not the arbitration agreement or delegation clause specifically.” The motion to compel therefore should have been granted for the arbitrator to consider the merits.

Rasier, LLC v. Boykin, No. 84814 (Nev. Aug. 24, 2023).