Contract Interpretation

Alabama Supreme Court Clarifies Courts’ Authority to Issue Preliminary Injunctions in Disputes Subject to Arbitration

June 22, 2023 by Alex Bein

In its recent decision in Hyundai Construction Equipment Americas Inc. v. Southern Lift Trucks LLC, the Alabama Supreme Court considered whether the trial court erred in granting preliminary injunctive relief in a dispute that was otherwise subject to arbitration.

Southern Lift Trucks, a heavy construction equipment dealer, filed a state court action against Hyundai Construction, a construction equipment manufacturer, alleging that Hyundai breached two separate dealership agreements between the parties by forcing unreasonable restrictions on Southern Lift and entering into separate dealership agreements with Southern Lift’s competitors in its sales territory. Southern Lift asserted claims for breach of contract, tort, conspiracy, and declaratory judgment against Hyundai arising from Hyundai’s alleged actions. Southern Lift also sought a preliminary injunction maintaining the status quo and precluding Hyundai from either terminating the dealership agreements or entering into new agreements with Southern Lift’s direct competitors. Hyundai moved to dismiss the complaint and to compel arbitration.

After a hearing, the trial court granted Southern Lift’s motion for a preliminary injunction. The trial court subsequently denied Hyundai’s motion to compel arbitration. Hyundai appealed both decisions.

In reversing in part the trial court’s denial of Hyundai’s motion to compel arbitration, the Alabama Supreme Court held that the parties’ disputes under both dealership agreements were subject to arbitration, except for Southern Lift’s declaratory judgment claim, which fell under a narrow carve-out in the agreements’ arbitration provisions.

Turning to the trial court’s preliminary injunction ruling, the court declared that under established Alabama law, courts have jurisdiction to enter preliminary injunctive relief to maintain the status quo between the parties, even when the dispute is otherwise subject to arbitration. But because the parties’ dispute was subject to two separate lines of business and dealership agreements, the court analyzed Southern Lift’s entitlement to preliminary injunctive relief under each dealership agreement separately.

Regarding the first dealership agreement, which dealt with construction equipment sales, the court noted that no such construction equipment had been sold under the agreement for more than two years, such that Southern Lift could not establish irreparable harm or difficulty in calculating damages as required to obtain a preliminary injunction. The court thus reversed the trial court’s grant of a preliminary injunction as to the construction equipment agreement.

As to the second dealership agreement, which dealt with forklift sales, the court noted that Southern Lift had provided evidence of significant and consistent sales of forklifts and other equipment subject to the agreement. Southern Lift also presented evidence that its reputation, goodwill, and customer base were being negatively affected by Hyundai’s complained-of actions. The court found that if it were to reverse the trial court’s entry of a preliminary injunction as to the forklift agreement on these facts, the court risked providing a “hollow victory” to Southern Lift should it ultimately prevail, whether in arbitration or before the court. As such, the court affirmed the trial court’s entry of a preliminary injunction as to the forklift agreement. This was so, notwithstanding the court’s determination that the majority of the dispute with respect to both agreements was subject to arbitration.

California District Court Finds Defendants’ Conduct Was Not Arbitrary and Capricious Under Administrative Procedure Act

June 16, 2023 by Kenneth Cesta

Citing the Administrative Procedure Act (APA), and recognizing the role of the district court in reviewing a final agency determination under the act, the U.S. District Court for the Northern District of California granted summary judgment to defendants Federal Crop Insurance Corp. (FCIC) and the U.S. Department of Agriculture’s Risk Management Agency (RMA), finding that the defendants’ determination was not plainly erroneous, arbitrary, or capricious.

Plaintiff M&T Farms purchased a crop protection insurance policy from Producers Agriculture Insurance Co. (ProAg) to insure its products from loss of revenue. The insurance policy issued by ProAg was reinsured by defendant FCIC. M&T submitted a claim under the policy, after which ProAg canceled the policy on the grounds that M&T was not a “qualifying person” under the policy and was not entitled to coverage. M&T then filed for arbitration challenging ProAg’s cancellation of the policy. As part of the arbitration, the arbitrator authorized M&T and ProAg to seek an interpretation of the policy from RMA in accordance with federal regulations. After seeking interpretations from the parties on the relevant issues, RMA accepted ProAg’s interpretation, which resulted in a determination of no coverage under the policy.

After an unsuccessful appeal to the National Appeals Division of the Department of Agriculture, M&T filed an action against FCIC and RMA seeking a declaratory judgment regarding the administrative determinations issued by RMA rejecting the claim for coverage under the policy. In granting the motion for summary judgment filed on behalf of defendants RMA and FCIC, the district court first noted that the arbitrator’s factual findings during the arbitration were not the subject of the present lawsuit, and the court’s review was limited to determining whether the defendants’ interpretations of the policy and handbook were arbitrary and capricious. The court first noted that FCIC’s interpretations should be given “substantial deference” given the broad grant of authority to the FCIC. The court then found the defendants’ interpretation of the policy and handbook was reasonable and was not arbitrary or capricious. In confirming the applicable standard of review, the court found that the determinations were not plainly erroneous and should not be vacated.

M&T Farms v. Federal Crop Insurance Corp., No. 5:21-cv-09590 (N.D. Cal. Mar. 9, 2023).

Alabama Supreme Court Reverses Orders Denying Motions to Compel Arbitration Under Employment Agreement

June 14, 2023 by Kenneth Cesta

In Women’s Care Specialists, P.C. v. Dr. Margot G. Potter and Dr. Karla Kennedy v. Dr. Margot G. Potter, the Alabama Supreme Court reversed opinions of the trial court that had denied motions to compel arbitration and held that the claims set forth in both of these consolidated matters were subject to arbitration.

Dr. Potter entered into an employment agreement with her former employer, Women’s Care Specialists. The agreement was amended three years later to add a termination of employment provision and an arbitration clause mandating binding arbitration for all disputes related to Dr. Potter’s employment with Women’s Care. Thereafter, Women’s Care terminated Dr. Potter’s employment. Potter alleged that after her termination, employees of Women’s Care and others made disparaging remarks to her former patients and tried to prevent her former patients from learning if they could continue their care with her. Potter began working at another clinic, at which point Women’s Care ceased making the compensation payments called for in the employment agreement. Dr. Potter filed an action against Women’s Care alleging tortious interference with a business relationship, defamation, and breach of contract. Dr. Potter also filed a separate action against certain Women’s Care employees alleging tortious interference and defamation. Women’s Care and the employees filed motions to compel arbitration in both actions, which motions were denied.

After consolidating the appeals, the Supreme Court noted that Women’s Care and the employees had met their burden of establishing the existence of an agreement to arbitrate and the existence of a contract or transaction affecting interstate commerce, and the burden then shifted to Dr. Potter to present evidence to show that the arbitration agreement did not apply to the dispute in question. The court rejected Dr. Potter’s argument that the arbitration clause only applied to disputes that arose while she was still an employee of Women’s Care, noting that the court has repeatedly held that the phrase “relating to” in an arbitration provision is to be given broad construction. The court found that since the employment agreement and arbitration clause specifically stated that the parties’ obligations did not terminate upon the expiration or termination of the agreement, Dr. Potter’s tort and contract-based claims were subject to arbitration even though her employment with Women’s Care had ended. The court reversed the lower court’s denial of the motions to compel arbitration and remanded the matters for proceedings consistent with the opinion.

Women’s Care Specialists, P.C. v. Dr. Margot G. Potter and Dr. Karla Kennedy v. Dr. Margot G. Potter, Nos. SC-2022-0706, SC-2022-0707 (Ala. May 19, 2023).

Arizona Permits Unilateral Modifications of Standard Consumer Contracts Upon Reasonable Notice and Opt-Out Opportunity

April 6, 2023 by Benjamin Stearns

In October 2018, Eva Cornell opened checking and savings accounts with Desert Financial Credit Union. In so doing, Cornell agreed to terms and conditions, including an agreement that Desert Financial could “change those terms and conditions from time to time.” In addition, Cornell also consented to the electronic delivery of all future communications from Desert Financial, including all disclosures, notices, and account statements. Notably, at the time Cornell opened the accounts, the parties’ contract did not include an arbitration clause.

In February 2021, Desert Financial updated its terms, adding a mandatory arbitration clause. The updated terms specified that agreement to the arbitration clause was not a mandatory condition of the customer maintaining an account with Desert Financial and that clients could opt out by providing notice by April 30, 2021, or 30 days after opening their account, whichever was later. Desert Financial did not directly contact its account holders regarding these updated terms. Rather, it posted on monthly account statements an orange-and-blue banner stating Desert Financial was making a “change-in-terms” and providing a link to the complete updated terms. Cornell received a notification from Desert Financial that her account statement was available for viewing but would only see the notice of the changed terms if and when she accessed the digital account statement.

Ultimately, Cornell never viewed or opted out of the updated terms. On May 5, 2021, Cornell filed a class action suit against Desert Financial alleging ambiguous and misleading language concerning overdraft fees. Desert Financial moved to compel arbitration. Cornell argued she never agreed to the updated terms and thus her agreement with Desert Financial did not include an arbitration clause. The District Court of Arizona certified a question to the Arizona Supreme Court as to whether Arizona law permits the unilateral modification of standard consumer contracts, and if so, what conditions must be satisfied to do so.

The Arizona Supreme Court answered the question in the affirmative, adopting Restatement Consumer Contracts § 3 in the process. The court found the Restatement “offers an effective modification procedure that fairly balances the public policies of economic efficiency and consumer protection.” The court summarized the requirements of Restatement § 3 as follows: “Consumers must (1) receive express and reasonable notice of the business’s right to unilaterally modify the agreement; (2) receive reasonable notice of new terms and the opportunity to opt out without penalty; and (3) upon receiving actual or constructive notice of new terms, continue the business relationship past a reasonable opt-out period.”

Per the court, adoption of the Restatement’s approach permits businesses to readily update their terms, facilitating economic efficiency in the context of standardized contracts, while simultaneously subjecting such changes to several safeguards designed to protect consumers from unfair exploitation.

Cornell v. Desert Financial Credit Union, No. CV-22-0071-CQ (Ariz. Mar. 2, 2023).

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

March 22, 2023 by Kenneth Cesta

In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).