Contract Interpretation

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).

Arbitration Provision Treated as Standalone Contract for Purposes of Determining Parties Capable of Compelling Arbitration

February 2, 2023 by Benjamin Stearns

The Ninth Circuit Court of Appeals reversed a district court decision and compelled arbitration based on its determination that one of the litigants, Experian, was a party to the arbitration provision, despite the fact that Experian was not a party to the wider agreement that contained the arbitration provision.

Elettra Meeks filed a putative class action against Experian under the Fair Credit Reporting Act. Ms. Meeks entered into a contract for credit monitoring services provided by Experian Consumer Services, an affiliate of Experian. The contract between ECS and Meeks contained an arbitration provision that defined ECS to include affiliates, such as Experian. However, the definition of ECS for purposes of the wider contract, separate and apart from the arbitration provision, did not include affiliates, such as Experian.

The district court found that Experian did not have a right to compel arbitration because it was not a party to the agreement. The Ninth Circuit reversed, relying on U.S. Supreme Court precedent that holds arbitration provisions to be “severable” from the larger contracts that contain them. Based on the precedent, the Ninth Circuit analyzed the parties to the arbitration provision as though it was a standalone contract, even though it was contained within a wider “Terms of Use Agreement.” Because the definition of ECS for purposes of the arbitration provision included its affiliates, Experian was considered a party to the arbitration agreement, irrespective of whether it was a party to the wider contract. Therefore, Experian had the power to compel arbitration.

Meeks v. Experian Information Services, Inc., Nos. 21-17023, 22-15028 (9th Cir. Dec. 27, 2022).

Sixth Circuit Affirms Judgment Compelling Arbitration in Kroger/Union Dispute

January 25, 2023 by Brendan Gooley

The Sixth Circuit recently rejected a challenge to a Rule 12(c) judgment compelling arbitration in a dispute between a Kroger subsidiary and a union that represented its employees.

Kroger Limited Partnership I (KLPI), which is part of The Kroger Company, had a collective bargaining agreement (CBA) with United Food & Commercial Workers, Local 1995. The union represented employees in KLPI’s stores in the greater Nashville, Tennessee area. In 2020, a different division of Kroger opened a warehouse in the area (Knoxville Local Fulfillment Center). The union claimed it represented employees at the new facility and Kroger and KLPI disagreed. The union sought to initiate arbitration and, when KLPI refused, filed a motion to compel arbitration. The union then moved for judgment on the pleadings pursuant to Rule 12(c). The district court granted the union’s motion as to KLPI — but not Kroger on the basis that Kroger was not a party to the arbitration clause in the CBA — KLPI appealed.

The Sixth Circuit affirmed and held that the union’s grievance fell within the scope of the arbitration agreement because the union argued that the Knoxville Local Fulfillment Center was a “store” as defined in the CBA within the geographic area covered by the CBA. The Sixth Circuit therefore applied a presumption of arbitrability that KLPI could only overcome by citing an “express provision excluding” the dispute from the scope of the arbitration clause or “forceful evidence of a purpose to exclude the claim from arbitration.” The court rejected KLPI’s claim that such evidence existed because the CBA’s definitions only applied to grocery stores, not the Knoxville Local Fulfillment Center. Although that may have been a plausible reading of the CBA, the provisions at issue did not “clearly and unambiguously” exclude the union’s claim, and the relevant clauses were susceptible to multiple interpretations. The court also rejected a claim by KLPI about what discovery would have shown as beyond the scope of its answer and thus, something that it could not consider in the scope of a Rule 12(c) motion. Consequently, the Sixth Circuit rejected the argument on the grounds that it went to the merits of the dispute, not the scope of the CBA’s arbitration agreement. The Sixth Circuit also rejected KLPI’s argument that the courts lacked jurisdiction over the union’s claim because the National Labor Relations Board had exclusive jurisdiction over the subject matter of the dispute.

United Food & Commercial Workers, Local 1995 v. Kroger Co., No. 22-5085 (6th Cir. Oct. 14, 2022).

Ninth Circuit Affirms District Court’s Order Denying Online Cryptocurrency Exchange’s Motion to Compel Arbitration of Users’ Claims

January 20, 2023 by Kenneth Cesta

In David Suski v. Coinbase, Inc., et al., the Ninth Circuit affirmed a district court order denying defendant Coinbase, Inc.’s motion to compel arbitration, concluding that issues surrounding a forum selection clause were not delegated to the arbitrator and were for the court to decide. The court further found that the forum selection clause in Coinbase’s official rules superseded the user agreement’s arbitration clause.

The case involved claims brought by the plaintiff and other users of Coinbase’s online cryptocurrency exchange who opted into Coinbase’s “Dogecoin Sweepstakes” in June 2021. When opening their accounts, the plaintiffs agreed to a Coinbase user agreement which included an arbitration provision. The plaintiffs later opted into the sweepstakes’ official rules, which included a forum selection clause providing that “California courts have exclusive jurisdiction over any controversies regarding the sweepstakes.” The plaintiffs later brought claims under California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act against Coinbase and another defendant hired by Coinbase to market and run the sweepstakes. Coinbase filed a motion to compel arbitration of the plaintiffs’ claims. The district court denied the motion, concluding that the “delegation clause” in the user agreement “did not delegate to the arbitrator the issue of which contract [the User Agreement or Official Rules] governed the dispute.” Applying state law principles of contract interpretation, the district court then ruled that the official rules superseded the user agreement, and that the arbitration clause contained in the user agreement did not apply to the plaintiffs’ claims.

The Ninth Circuit affirmed the district court’s order and addressed Coinbase’s argument that the district court erred when it concluded that the user agreement did not delegate to the arbitrator the issue of whether the forum selection clause in the official rules superseded the arbitration clause in the user agreement. The court noted its decision in Oracle Am. Inc. v. Myriad Grp. A.G., (9th Cir. 2013) that “[w]hether the court or the arbitrator decides arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” The court then found that the district court correctly ruled that in this case, the issue of whether the forum selection clause in the official rules superseded the arbitration clause in the user agreement “was not delegated to the arbitrator, but rather was for the court to decide.”

The court then addressed Coinbase’s argument that the district court erred when it concluded that the forum selection clause in the official rules superseded the arbitration clause contained in the user agreement. The court noted that state law principles of contract formation and interpretation apply “when determining whether parties have agreed to submit to arbitration” and when there are two contracts dealing with the same subject matter without addressing whether the second contract is a substitute for the first, “the two contracts must be interpreted together and the latter contract prevails to the extent they are inconsistent.” The court agreed with the district court that given the conflict between the official rules and the user agreement, “the Official Rules’ forum selection clause supersedes the User Agreement’s arbitration clause” since the official rules came after the user agreement.

David Suski, et al. v. Coinbase, Inc., et al., No. 22-15209 (9th Cir. Dec. 16, 2022)