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Contract Interpretation

Third Circuit Reverses Judgment Enjoining Arbitration Proceeding, Remands to District Court for Further Consideration

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In Field Intelligence Inc. v. Xylem Dewatering Solutions Inc., the Third Circuit Court of Appeals agreed with the district court’s determination that the court, not the arbitrator, was required to determine whether the parties’ first agreement, which included an arbitration agreement, was superseded by a second agreement, which did not contain an arbitration provision. However, the court then reversed the district court’s judgment, which determined that the agreement containing the arbitration provision had been superseded, and remanded the matter for further consideration of the defendant’s motion to stay the federal court litigation while arbitration is pending.

Defendant Xylem Dewatering Solutions manufactures and sells large-capacity water pumps. Xylem entered into two agreements with plaintiff Field Intelligence Inc. to develop a solution to allow Xylem customers to better monitor the water pumps. The first agreement, in 2013, was a “non-disclosure agreement” that included an arbitration provision requiring that any “dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof,” be “settled by arbitration in accordance with the Rules of the American Arbitration Association.” The second agreement, in 2017, was a “software subscription service agreement” and did not include an arbitration provision, instead requiring any “action under or concerning” that agreement to be litigated in a state or federal court in New Jersey. A dispute arose between the parties and Field Intelligence filed an action in the district court for breach of the 2017 agreement. After engaging in some early discovery, Xylem then filed an arbitration demand with the AAA seeking various relief, including a determination that it did not breach the 2013 agreement. Xylem moved to stay Field Intelligence’s federal court action pending resolution of the arbitration. Field Intelligence opposed the motion to stay and cross-moved to enjoin the arbitration. The district court held it had the authority, rather than the arbitrator, to decide whether the second contract (without an arbitration provision) superseded the first, and then found the later agreement did in fact supersede the first agreement. The district court enjoined the arbitration that Xylem had filed and denied as moot Xylem’s motion to stay the federal litigation.

The Third Circuit agreed that the district court was authorized to determine whether the second contract superseded the first, holding that “the parties’ supersession dispute is for a court, not an arbitrator, to decide” and “before sending parties to an arbitrator, a court must decide whether they agreed to resolve their dispute in that forum.” However, the Third Circuit found that since there was no indication in the 2017 agreement that the parties intended to replace the 2013 agreement, “the 2013 contract’s arbitration provision is still in effect, and Xylem was entitled to arbitrate claims tied to that agreement.” The court further held that “Xylem did not waive its right to pursue arbitration for claims arising under the 2013 contract merely by engaging in this litigation.” The court then reversed the district court’s judgment enjoining the arbitration proceeding, vacated the judgment denying Xylem’s motion to stay the federal litigation while arbitration is pending, and remanded that issue to the district court “to consider the merits of that motion in light of our opinion.”

Field Intelligence Inc. v. Xylem Dewatering Solutions, Inc., No. 21-2087 (3d Cir. Sept. 13, 2022).

Denial of Motion to Compel Arbitration Vacated by Second Circuit Due to Insufficient Record Evidence of Presentment of “Scrollwrap Agreement” to Users

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Nicole Zachman brought a putative class action against the Hudson Valley Federal Credit Union (HVCU) for breach of contract and violation of the federal Electronic Fund Transfer Act, among other claims, based on HVCU’s alleged practice of collecting overdraft or insufficient funds fees on accounts that were not actually overdrawn. HVCU moved to compel arbitration based on an arbitration provision included in the modified account agreement Zachman signed in 2019 when she opened her online account with HVCU. Zachman countered that the account agreement she signed in 2012, when she originally opened her account with HVCU, did not contain an arbitration agreement and further that she was not bound by the arbitration provision added in 2019 because she was never provided notice of its addition.

In response, HVCU argued that Zachman was on “inquiry notice” of the arbitration provision’s inclusion in the 2019 modified account agreement. Under New York law, an offeree who does not have actual notice of contract terms is nevertheless bound by those terms if he or she is on inquiry notice of them and assents to them through conduct. “In determining whether an offeree is on inquiry notice of contract terms, New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. This often turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.” When applied to web-based contracts, the courts “look to the design and content of the relevant interface” to determine if the contract terms were presented to the offeree in a way that would put him or her on inquiry notice of the terms.

Here, the Second Circuit determined that the record was insufficiently developed to permit a determination as to whether the presentment of the arbitration provision to users like Zachman was sufficiently “clear and conspicuous” to put her and other users on inquiry notice. The record contained evidence that the modified account agreement containing the arbitration provision was published on the HVCU website. HVCU customers could access the agreement by searching the HVCU website using its built-in search bar or clicking through the website’s “resources” tab to the “account disclosures” webpage. Users could also obtain a hard copy of the agreement by requesting it be mailed to them or by visiting a brick-and-mortar branch. However, HVCU did not post a notice of the added provisions in its quarterly newsletters or in members’ electronic statements, nor did it provide notice in any other fashion, such as by posting a “banner” notification on its webpage.

When HVCU established its new online banking system in 2019, it required users to first register their accounts. To register, users had to click through various “clickwrap” or “scrollwrap” agreements, including an “internet banking agreement.” The internet banking agreement incorporated the modified account agreement and provided links to it. The modified account agreement included the mandatory arbitration provision at issue.

The district court ruled that HVCU failed to demonstrate that Zachman’s registration for online banking put her on inquiry notice of the arbitration provisions. The court found that HVCU “provides no visual aid or description of any layout or design of the webpages that a user sees when registering for online banking services.” HVCU provided a copy of the internet banking agreement “but did not provide screenshots of the webpage(s) presenting the Internet Banking Agreement to online banking registrants.” Reviewing the copy of the internet banking agreement that had been provided, the court found that the relevant hyperlink and language “appear to be buried” in the agreement and, therefore, that HVCU had failed to establish Zachman was on inquiry notice. As a result, it denied the motion to compel.

The Second Circuit, however, vacated and remanded for further proceedings. The appellate court noted that HVCU did not submit any evidence of how the internet banking agreement was presented to users. “As a result, the district court could not resolve whether Zachman was on inquiry notice because, as it noted, it was unable to assess whether the relevant language and hyperlink are clear and conspicuous.” The district court could not properly engage in the required analysis based on the copy of the internet banking agreement in the record; rather, it was necessary to know “the design and content of the webpage and how the terms were presented.” Because no such evidence was presented by either party, the Second Circuit vacated and remanded for further proceedings to develop the record on this issue.

Zachman v. Hudson Valley Federal Credit Union, No. 21-999 (2d Cir. Sept. 14, 2022).

District Court Orders Limited Trial to Address Party’s Authority to Sign Arbitration Agreement

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Relying on the Federal Arbitration Act and recognizing that “this case presents one of the rare instances in which a defendant opposing arbitration survives the initial stage of an FAA proceeding,” the U.S. District Court for the Eastern District of Kentucky denied the defendant’s motion to dismiss the plaintiff’s action to compel arbitration and ordered the matter to proceed to trial on the limited issues concerning the validity and enforceability of the arbitration agreement.

In August 2010, Opal Wells executed an unlimited power of attorney providing her son Leonard Wells as her attorney-in-fact and agent. Opal was admitted to the Boyd Nursing and Rehabilitation Center in 2013. In 2019, when new owners took over Boyd, they took steps to obtain signatures on paperwork regarding Opal, which included an arbitration agreement. The arbitration agreement was part of a larger document but had its own signature block, which Leonard signed as his mother’s “responsible party.” Opal passed away in September 2020 and Leonard filed a state court action on behalf of her estate and wrongful death beneficiaries. Boyd then filed an action in the district court to compel arbitration of the state court claims, asserting that the power of attorney “provided Leonard with the authority to sign the Arbitration Agreement on Opal’s behalf.” Leonard filed a motion to dismiss Boyd’s action on several grounds, including lack of subject matter jurisdiction, failure to join an indispensable party, and the Colorado River abstention doctrine. The district court rejected each of those arguments. Leonard also raised arguments regarding the validity and enforceability of the arbitration agreement, asserting that the arbitration agreement was unconscionable because it was “part of a mass-produced, boiler-plate, pre-printed document” and that “an obviously gross disparity of bargaining power” supports a finding of unconscionability. The court rejected those arguments as well, noting that the court has “previously found that nursing home arbitration agreements with similar characteristics fall short of the high bar for procedural unconscionability despite their ‘boilerplate’ language” and that the claim of unequal bargaining power was unsupported.

Finally, Leonard argued that the authority he maintained as Opal’s power of attorney expired when she became incapacitated, rendering him incapable of signing the arbitration agreement on her behalf. With regard to this issue, the court concluded that “the making of the agreement is in issue” such that “this matter must proceed to trial” on limited issues regarding whether “Opal was incapacitated prior to the signing of the Arbitration Agreement” and, if necessary, “whether Leonard lacked actual knowledge of Opal’s incapacitation such that he could in good faith validly bind her and her successors in interest.” The court noted that the “Sixth Circuit has stated that ‘parties may seek targeted discovery on … disputed contract-formation questions’ under the FAA, provided that ‘any discovery must comport with § 4, which calls for a summary trial — not death by discovery.’” The court ordered the matter to proceed to trial on the limited issues addressed in the opinion and permitted limited discovery on the triable issues.

Boyd Nursing & Rehabilitation, LLC v. Wells, No. 0:22-cv-00011 (E.D. Ky. Aug. 30, 2022).

New York Federal Court Holds Questions of Arbitrability to Be Resolved by Arbitrator in Labor Dispute

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In a recent decision, a New York federal magistrate judge considered whether threshold questions of arbitrability were to be decided by the court or by an arbitrator in a labor dispute between a Jewish religious organization and its former employees.

Upon leaving employment at the Kabbalah Centre, the plaintiffs signed separation agreements, which included arbitration clauses providing that any disputes related to employment or to the separation agreement itself were to be decided in arbitration. The plaintiffs nonetheless brought an action against the Kabbalah Centre in federal court, arguing that the separation agreements and their arbitration clauses were the products of improper, coercive tactics by their former employer and were therefore unenforceable. The Kabbalah Centre moved to compel arbitration under the terms of the separation agreements.

As an initial matter, the court distinguished between challenges to an arbitration clause in a contract, and challenges to the contract as a whole. Citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the court noted that the former type of challenge must be decided by the court, while the latter type of challenge was within the purview of the arbitrator.

In granting the Kabbalah Centre’s motion to compel arbitration, the court found that the plaintiffs did not challenge the facial validity of the separation agreements’ arbitration provisions but rather asserted that the contract as a whole should be deemed void. As such, the court looked to the arbitration provisions themselves to determine whether they addressed threshold issues of arbitrability. The court concluded in the affirmative, noting that the separation agreements delegated questions of arbitrability to the arbitrator by incorporating the rules of the American Arbitration Association and JAMS. The court rejected the plaintiffs’ additional arguments and granted the Kabbalah Centre’s motion to compel arbitration accordingly.

 Greene v. Kabbalah Centre International, Inc., No. 1:19-cv-04304 (E.D.N.Y. Sept. 1, 2022).

Sixth Circuit Holds That District Court Erred by Not Analyzing Whether Non-Signatory Consented to Arbitration

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The Sixth Circuit Court of Appeals recently vacated and remanded an order concluding that a party was not bound by an arbitration award after concluding that the district court failed to consider whether that party may have consented to arbitration through its actions even though it was not a signatory to the collective bargaining agreement that contained the arbitration clause.

Greenhouse Holdings LLC did business as Clearview Glass and Glazing in Kentucky. Greenhouse also owned 90% of Clearview Glass and Glazing Contractors of Tennessee LLC. The International Union of Painters and Allied Trades District Council 91 filed a grievance against “Clearview Glass” alleging that it violated a collective bargaining agreement the union had. It was unclear whether “Clearview Glass” meant Greenhouse (based on its trade name Clearview Kentucky), Clearview Tennessee, or both. The union argued that Greenhouse was bound by the collective bargaining agreement and an arbitration clause therein. Greenhouse disputed that. The arbitrator apparently sided with the union and issued an order that affected Clearview Kentucky (i.e., Greenhouse). Greenhouse challenged that award.

The district court vacated the arbitrator’s award “to the extent it applies to Greenhouse.” The district court “held that Greenhouse wasn’t a party to the [collective bargaining agreement] and thus the arbitrator acted outside his authority to the extent the award applied to Greenhouse.”

The Third Circuit vacated the district court’s decision. It held that the district court “didn’t address this threshold question” of whether Greenhouse had consented to arbitration even though it did not sign the collective bargaining agreement that contained the arbitration clause. The Third Circuit explained that “an agreement to arbitrate need not be in writing” and that courts “may infer agreement when a party willingly participates in [an] arbitration without objecting to the arbitrator’s jurisdiction.”

The Third Circuit further explained that whether a party has consented to arbitration it otherwise may not have agreed to is a fact-intensive inquiry, and it remanded the case to the district court to analyze that question under the facts of the case.

Greenhouse Holdings, LLC v. International Union of Painters & Allied Trades District Council 91, No. 21-6164 (6th Cir. Aug. 8, 2022).