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Arbitration / Court Decisions

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

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Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 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).

Two California Federal Courts Grant Motions to Compel Arbitration, Finding Arbitration Agreement is Neither Procedurally nor Substantively Unconscionable

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In two separate consumer lawsuits against cryptocurrency exchange Coinbase, federal trial courts in California granted Coinbase’s motions to compel arbitration based on the arbitration provision in its user agreement.

In Donovan v. Coinbase Global, Inc. and Pearl v. Coinbase Global, Inc., plaintiffs were customers of defendant Coinbase, a currency exchange that allows users to buy and trade various forms of cryptocurrency. In both cases, Coinbase moved to compel arbitration based on the terms of its user agreement. In their opposition briefs, plaintiffs conceded that they agreed to Coinbase’s user agreement and that the user agreement contained an arbitration agreement. However, plaintiffs argued that the arbitration provision was unconscionable and therefore unenforceable as a matter of law.

As the courts noted, a party seeking to invalidate a contractual provision as unconscionable must prove both “substantive” and “procedural” unconscionability. Procedural unconscionability refers to the manner in which the contract was negotiated. The two courts noted that in the context of contracts of adhesion, the question of procedural unconscionability turns on whether the circumstances of the contract’s formation creates “oppression or surprise,” and whether offending provisions were “buried in a lengthy agreement.” Substantive unconscionability, by contrast, focuses on whether a contract term leads to “overly harsh” or “one-sided” results.

In the two decisions, both courts first addressed procedural unconscionability. The plaintiffs argued that the arbitration agreement in Coinbase’s user agreement was procedurally unconscionable on the grounds that it was presented in “inconspicuous font” and “buried in lengthy text” in the agreement. The courts disagreed, noting that while the user agreement was indeed a contract of adhesion, Coinbase was not the only cryptocurrency exchange available to the plaintiffs, and, in any event, Coinbase reasonably informed its users of changes to the arbitration provision in its user agreement via email and clearly labelled the arbitration provision within the agreement. As such, both courts found only “minimal” procedural unconscionability arising from the arbitration provision in Coinbase’s user agreement.

Regarding substantive unconscionability, the plaintiffs argued that certain provisions of the arbitration agreement were unfairly one-sided, benefitting Coinbase to its consumers’ detriment. Both courts rejected this argument. The Donovan court held that the plaintiffs in that case failed to meet their burden of establishing that the one-sided nature of the referenced provisions rose to the level of unconscionability. While the Pearl court reached the same result, it also found that the plaintiff’s unconscionability challenge was not directed at the specific language delegating arbitrability challenges to the arbitrator, and concluded that the plaintiff’s unconscionability challenge was thus an issue to be decided by the arbitrator in the first instance. In both cases, the courts rejected the plaintiffs’ remaining arguments and granted Coinbase’s motions to compel arbitration.

Donovan v. Coinbase Global, Inc., 22-cv-02826 (N.D. Ca. Jan. 6, 2023)

Pearl v. Coinbase Global, Inc., 22-cv-03561 (N.D. Ca. Feb. 3, 2023)

Supreme Court of Wyoming Confirms Arbitration Award

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The Supreme Court of Wyoming recently rejected claims by a party that had largely prevailed in arbitration, but asserted that it should have received its fees, and that the arbitrator incorrectly decided several issues.

Fork Road, LLC owned part of a building that it purchased from JAMD, LLC. Mountain Business Center, LLC (MBC) was a tenant in that building. JAMD requested, on behalf of Fork Road, that MBC provide information about subtenants. MBC provided certain information, but withheld other information. Fork Road and MBC ended up in arbitration over that withholding and various other issues related to MBC’s lease. The arbitrator ruled in favor of MBC on certain claims and Fork Road on other claims, but ultimately awarded MBC nearly $24,000. MBC argued that it was the prevailing party and sought its fees, but the arbitrator declined to award them because this was a “mixed outcome” case, in which both parties prevailed on certain claims.

MBC challenged the award, arguing that the arbitrator had exceeded his authority because one of Fork Road’s witnesses had “waived” certain claims by Fork Road, but the arbitrator had nevertheless decided those claims. MBC also argued that it was the prevailing party and therefore entitled to fees and that the arbitrator erred by not applying the “first to breach rule” and holding that Fork Road had been the first to materially breach the lease.

The Supreme Court of Wyoming rejected MBC’s claims noting, “MBC cite[d] no authority that testimony by a lay witness on the substantial acts at issue may be used by party to limit its opponent’s claims.” It also held that the arbitrator did not have to award MBC fees even if it was true, as MBC argued, that MBC had prevailed on the “central issue” in the case.  The court also held that the arbitrator did not commit manifest error by not applying the “first to breach rule,” where MBC had stayed in the building after Fork Road allegedly breached the lease.

Mountain Business Center, LLC v. Fork Road, LLC, No. 2-22 WY 147 (Wyo. Nov. 23, 2022).

Fifth Circuit Affirms Judgment Confirming Award Despite Concluding Lower Courts Erred by Not Considering Claim That Dispute Could Not be Arbitrated

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The Fifth Circuit affirmed judgments confirming an arbitration award despite concluding that the lower courts should have considered one of the party’s claims that a dispute decided by the arbitrator was beyond the scope of arbitration.

Attorney Jon Amberson represented his then father-in-law, James McAllen, a rancher, in litigation related to an oil company burying toxic chemicals on McAllen’s ranch. Amberson’s engagement letters included arbitration clauses. Disputes arose about Amberson’s representation, and Amberson and McAllen arbitrated those disputes, as required by the engagement letters.

A controversy also arose about a separate transaction involving Amberson and McAllen (Cannon Grove Transaction). McAllen purportedly used an entity Amberson created (ANR) for a transaction in which McAllen transferred $4.5 million to ANR. McAllen later asked for his money back, but Amberson refused, claiming that the money had been a gift.

Amberson moved to compel arbitration of all the claims between him and McAllen except for the Cannon Grove Transaction dispute. A Texas state court ordered Amberson and McAllen to arbitrate all their disputes, including the Cannon Grove Transaction Dispute.

Amberson and McAllen then arbitrated all their disputes. McAllen prevailed and moved to confirm a substantial award in his favor. While McAllen’s motion to confirm was pending, Amberson and ANR filed for bankruptcy. McAllen then sought to confirm the award in bankruptcy court. The bankruptcy court concluded that it could not consider Amberson’s argument that the Cannon Grove Transaction dispute should not have been arbitrated. On appeal, a federal district court affirmed the bankruptcy court judgment.

Amberson then appealed to the Fifth Circuit, which affirmed, albeit on different grounds. The Fifth Circuit concluded that the bankruptcy court erred by holding that it could not consider Amberson’s argument that the Cannon Grove Transaction dispute should not have been arbitrated. It explained that the Texas General Arbitration Act “allows a party to renew arguments in a motion to vacate that were rejected prior to arbitration about the scope of the arbitration agreement.” Thus, the Fifth Circuit held that “Amberson was entitled . . . to have the argument,” “that the arbitrator had exceeded his powers in resolving the Cannon Grove claim” “considered” by the bankruptcy and district courts. Nevertheless, the Fifth Circuit rejected Amberson’s arguments that the Cannon Grove Transaction dispute was not arbitrable on the merits. The Fifth Circuit therefore affirmed the judgments confirming McAllen’s award.

In the Matter of: Jon Christian Amberson, No. 21-50960 (5th Cir. Nov. 18, 2022).