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Jurisdiction Issues

Arbitrability Is Question for Court in Case Alleging Fraud Regarding Agreement Between Parties

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The Court of Appeals of Maryland recently held that the question of arbitrability was for a court, not an arbitrator, to decide where the plaintiffs alleged that the defendants had fraudulently induced them to enter agreements they did not understand contained arbitration clauses.

Several Maryland residents obtained structured settlements to compensate them for injuries allegedly caused by their purported exposure to lead-based paint. Access Funding, LLC and Assoc, LLC (collectively the “Factoring Companies”) entered into agreements with those residents whereby the Factoring Companies paid them a discounted lump sum and the residents assigned their rights to periodic future payments to the Factoring Companies. The agreements contained arbitration clauses that stated “[o]nce your transaction has closed any claim or dispute . . . shall be resolved by mandatory binding arbitration.” Under Maryland law, the agreements were contingent on court approval, which the parties obtained.

The residents subsequently filed a putative class action complaint alleging, among other things, that the Factoring Companies engaged in fraud and other misconduct in inducing them to execute the agreements. To make a procedurally complex story much more simple, the Factoring Companies moved to compel arbitration. The Maryland trial court granted the motion to compel, reasoning that arbitrability was for the arbitrator to decide, but Maryland’s intermediate appellate court reversed. The Court of Appeals of Maryland reviewed the case and agreed with the intermediate appellate court that the motion to compel should have been denied.

The court held that “the question of whether a valid arbitration agreement exists is a question for the court to determine” where a plaintiff alleges that the “approval of the transfer of their structured settlement payment rights was procured through fraud and deceit” and the plaintiff denies “the existence of a valid agreement to arbitrate.” The court explained, “a plaintiff’s alleged inability to understand the terms of an arbitration clause in a written agreement, on the ground that the other party procured the agreement through fraud and deceit, places the existence of a valid agreement to arbitrate at issue and raises an issue to be decided by the court, not the arbitrator.” In this case, the court explained that the plaintiffs allegedly suffered from cognitive deficiencies and had pleaded that the Factoring Companies and other defendants had colluded to “interfere with their ability to obtain independent professional advice and sought to prevent them from fully understanding and appreciating the agreement’s provision with respect to binding arbitration.” The court found these allegations sufficient to place the existence of a valid agreement in question.

Alternatively, the court also held that because “the plain language of the arbitration clause expressly conditions arbitration on closure of the transaction” the plaintiffs “challenge[d] the existence of an agreement to arbitrate, which is an issue for the court” not the arbitrator.

Of note, the court also explained that the Maryland Uniform Arbitration Act, which governed the arbitration issues in this case, was meant to mirror the FAA.

Access Funding, LLC, et al. v. Chrystal Linton, et al., No. 5, September Term 2022 (Ct. App. Md. Dec. 1, 2022).

 

Ninth Circuit Dismisses Appeal of Denial of Motion to Compel Arbitration as Moot After the Complaint Was Amended While the Appeal Was Pending

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The plaintiff’s original complaint relied on a certain purchase agreement (PA) that included an arbitration clause. While the appeal was pending, the lower court permitted the plaintiff to amend the complaint to no longer rely on the PA for its claims. As a result, the plaintiff contended that the appeal was moot since there was no longer a basis to invoke the arbitration clause. The appellants, however, challenged the lower court’s ruling permitting an amendment to the pleading during the appeal, and further argued that the amended complaint still relied on the PA.

The Ninth Circuit held that a “plaintiff is master of the complaint and an appeal seeking review of collateral orders does not deprive the trial court of jurisdiction over other proceedings in the case.” (Citing Ninth Circuit precedent and noting that the U.S. Supreme Court has granted a petition for a writ of certiorari to resolve the split in the circuits on whether an appeal of the denial of a motion to compel arbitration “oust[s] a district court’s jurisdiction to proceed with litigation pending appeal” or instead, whether “the district court retain[s] discretion to proceed with litigation while the appeal is pending.”)

The Ninth Circuit then concluded that the amended complaint did not rely on the PA, and, in any event, the plaintiff stipulated that he had abandoned any claim under the PA. The court therefore dismissed the appeal as moot.

Matter of Giga Watt, Inc., Case No. 22-35104 (9th Cir. Dec. 23, 2022).

First Circuit Affirms Order Compelling Arbitration and Rejecting Claim By Postmates Couriers of Exemption From the FAA

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In Damon Immediato, et al., v. Postmates, Inc., the First Circuit addressed the issue of whether couriers who deliver goods from local restaurants and grocery stores are “transportation workers engaged in interstate commerce such that they are exempt from the Federal Arbitration Act.”  The court affirmed the district’s court’s decision granting defendant’s motion to compel arbitration and concluding that the plaintiffs were not exempt from the FAA.

The defendant, Postmates, operates an online platform that allows customers to order local takeout and certain products from local grocery stores. Plaintiffs are couriers for Postmates who made deliveries to customers in the Boston area. When plaintiffs registered as couriers, they were required to accept Postmates “Fleet Agreement” which, among other things, classifies the couriers as independent contractors and includes a mutual arbitration provision governed by the FAA. The arbitration provision requires all disputes be resolved through final and binding arbitration under AAA Rules, but allows a courier to opt-out of the arbitration provision within 30 days of accepting the Fleet Agreement. Plaintiffs did not opt out of the arbitration provision.

Plaintiffs filed an action in Massachusetts state court on behalf of themselves and a putative class of couriers, alleging Postmates misclassified them as independent contractors and, as employees, they were entitled to benefits such as reimbursement of business expenses, the payment of a minimum wage, and paid sick leave.  Postmates removed the action to federal court and moved to compel arbitration. Plaintiffs opposed the motion contending they were exempt from the FAA under 9 U.S.C. §1. The district court determined the exemption did not apply, granted Postmates’ motion to compel arbitration, and stayed the federal action pending the outcome of the arbitration. Plaintiffs accepted individual offers of judgment in the arbitration and the district court dismissed the case.

On appeal, the plaintiffs argued they “belong to a class of workers encompassed by the residual clause of section 1 and are therefore outside the grasp of the FAA.”  Section 1 of the FAA provides, in part, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The court noted, however, that the Supreme Court “has interpreted the residual clause of this exemption to apply only to ‘transportation workers,’ meaning workers who play a ‘necessary role’ in the interstate transport of goods.” [Citation omitted]. The court rejected plaintiffs’ argument, concluding “couriers who deliver meals and goods as the result of local purchases from local vendors are not within a class of workers ‘engaged in foreign or interstate commerce’ who are exempt from the FAA under section 1.” Plaintiffs also contended on appeal if they are not exempt from the FAA under section 1, then their contracts with Postmates must be outside the coverage of section 2 of the FAA, “which extends the FAA’s reach to all contracts ‘involving’ interstate commerce. 9 U.S.C. §1, 2.” The court rejected this argument as well, concluding “appellants’ employment contracts are covered under section 2 of the Act because couriers who make local retail deliveries affect interstate commerce, but those contracts are not exempt under section 1 because the appellants are not part of a class of workers actively engaged in the interstate transport of goods. The district court was therefore required to compel arbitration according to the terms agreed to by the parties.”

Damon Immediato, et al, v. Postmates, Inc., No. 22-1015 (1st Cir. Nov. 29, 2022)

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

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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)

Seventh Circuit Affirms District Court Decision Refusing To Refer Putative Class Action Under the Illinois Biometric Information Privacy Act to Arbitration

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In Joshua Johnson v. Mitek Systems, Inc., the Seventh Circuit affirmed a district court order denying defendant Mitek Systems, Inc.’s motion to compel arbitration of the plaintiff’s claims brought under the Illinois Biometric Information Privacy Act. The case before the district court involved a putative class action brought on behalf of Joshua Johnson, and all others similarly situated, in Illinois state court. Mitek removed the matter to the U.S. District Court for the Northern District of Illinois pursuant to the Class Action Fairness Act. A company referred to in the decision as HyreCar “is an intermediary between people who own vehicles and other people who would like to drive for services such as Uber and GrubHub.” HyreCar verifies an applicant’s background and in so doing, sends certain personal information about the applicant to Mitek, which “provides identity-verification services.” Johnson alleges that Mitek used his information without the consent required by section 15 of BIPA.

Johnson’s contract with HyreCar included an arbitration clause which obligated Johnson to arbitrate any claims “with a long list of entities” including “all authorized or unauthorized users or beneficiaries of services or goods provided under the Agreement.” After removing the case to the district court, Mitek filed a motion to compel arbitration which was denied. Mitek then filed an immediate appeal to the Seventh Circuit pursuant to 9 U.S.C. §16(a)(1), contending that it is “a beneficiary of services or goods provided under the Agreement,” thereby requiring that the plaintiff arbitrate his claims against Mitek pursuant to the arbitration clause in the agreement he signed with HyreCar.

The Seventh Circuit rejected Mitek’s claims that the plaintiff is required to arbitrate his claims, finding that “‘the services or goods provided under the Agreement’ are vehicles, plus some ancillary aid that HyreCar furnishes to drivers.” The court further found that Mitek “does not receive ‘services or goods … under the Agreement’ between Johnson and HyreCar” and that Mitek cannot be classified as a “user” of HyreCar’s services or goods. The court noted that while courts “cannot disfavor arbitration, compared with other agreements” they may not “jigger the rules to promote arbitration” … and that “it would stretch contractual language past the breaking point” to conclude that Johnson or any of the other drivers agreed to arbitrate with Mitek. The court also rejected Mitek’s claim that the plaintiff should be equitably estopped from litigating the lawsuit, finding that the plaintiff “has not done anything that would estop himself from litigating this suit.” The court affirmed the district court’s decision refusing to refer the matter to arbitration, and remanded the case for a determination of whether the action may proceed as a class action “except for the claim under §15(c) of BIPA” which the court held must be remanded to state court.

Joshua Johnson v. Mitek Systems, Inc., No. 22-1830 (7th Cir. Dec. 21, 2022)