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Arbitration / Court Decisions

Ninth Circuit Holds That a Change-of-Terms Provision Cannot Bind Parties To a New Browse-Wrap Agreement

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The Ninth Circuit recently concluded that a consumer was not bound by updated terms merely because she accessed a website that contained new terms in a “browse-wrap” agreement on the website. The court also concluded that an arbitration clause in the original “click-wrap” terms that did apply did not preclude arbitration under a California rule invalidating arbitration clauses that preclude public injunctive relief actions under the California Unfair Competition Law.

In 2014, Rachel Stover purchased a credit monitoring product called Experian Credit Score. In so doing, she assented to certain terms and conditions, including an arbitration clause requiring arbitration of any claims arising out of the transaction “to the fullest extent permitted by law” and a change-of-terms provision stating that “[e]ach time” she “accessed . . . the . . . Product Website,” she manifested to “the then-current” terms of the agreement.

Stover cancelled her subscription in 2014, but accessed the website again in 2018. The following day, she filed a putative class action in California federal court alleging violations of, inter alia, the Fair Credit Reporting Act and California’s Unfair Competition Law.

Experian moved to compel arbitration. The District Court granted that motion. It concluded that (1) the dispute was governed by Experian’s 2018 terms because the change-of-terms clause in the 2014 terms made the 2018 operative as soon as Stover logged onto the website in 2018, (2) a carve out for Fair Credit Reporting Act claims in the 2018 terms did not apply, and (3) Stover’s claims were not exempt from arbitration under the California Supreme Court’s decision in McGill v. Citibank, N.A., 393 P.3d 85, 94 (Cal. 2017), which held that “a provision in any contract . . . that purports to waive, in all fora, the statutory right to seek public injunctive relief under the [California Unfair Competition Law (UCL)] is invalid . . . .”

The Ninth Circuit affirmed on appeal, albeit on different grounds.

The court held that “[i]n order to bind parties to new terms pursuant to a change-of-terms provision, consistent with basic principles of contract law, both parties must have notice that the terms have changed and an opportunity to review the changes.” In this case, “[b]ecause Stover ha[d] not alleged that she had such an opportunity, the 2018 terms did not form a valid contract.” The court also explained “that mere inquiry notice of changed terms is [not] enough to bind the parties to them” and that “Stover had no obligation to investigate whether Experian issued new terms without providing notice to her that it had done so.” The 2014 terms applied.

The court then concluded that arbitration was not precluded by McGill. The arbitration clause in the 2014 terms provided for arbitration “to the fullest extent allowed by law.” That phrase “presumably exclude[d] claims for public injunctive relief in California.” Stover’s claims, the court explained, did not meet the Article III standing requirement for seeking public injunctive relief. As a result, “the McGill rule d[id] not excuse Stover from binding arbitration.”

Rachel Stover v. Experian Holdings, Inc., No. 19-55204 (9th Cir. Oct. 21, 2020).

Court Grants Temporary Restraining Order Enjoining FINRA Arbitration From Proceeding Pending a Decision on Arbitrability

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A court recently granted a temporary restraining order enjoining a FINRA arbitration from proceeding after the court concluded that there was a serious question regarding arbitrability.

Barry Horowitz, an estate planning attorney who had a relationship with Lincoln Financial Securities Corporation, allegedly referred some clients to Thomas D. Renison, an insurance agent.

Renison was charged with federal crimes (though those charges were later dropped). Renison nevertheless was barred from the securities industry. Horowitz ultimately terminated his relationship with Renison as a result of these alleged improprieties.

Several of Horowitz’s clients whom he had referred to Renison claimed that Horowitz and Lincoln Financial were liable for damages caused by Renison’s alleged fraud.

The clients sought to arbitrate the dispute under FINRA’s arbitration rules. Horowitz and Lincoln Financial sought to stay those proceedings, but when those requests were denied, filed a declaratory judgment action seeking a declaration that the clients did not have a right to compel arbitration because there was no written arbitration agreement between the parties, and FINRA did not apply. Horowitz and Lincoln Financial sought a temporary restraining order enjoining the FINRA arbitration from proceeding until a court could rule on the question of arbitrability.

The United States District Court for the District of Connecticut granted the temporary restraining order requested by Horowitz and Lincoln Financial. The court noted that, under Second Circuit precedent, Horowitz and Lincoln Financial would be irreparably harmed if they were forced to expend time and resources arbitrating an issue that was not arbitrable. The court also concluded that Horowitz and Lincoln Financial had raised a serious question as to whether FINRA applied because there was an open question as to whether the clients were their “customers” within the meaning of FINRA Rule 12200. Finally, the court found that the hardships tipped decidedly in favor of Horowitz and Lincoln Financial because a temporary restraining order maintained the status quo, and because arbitrability rested on a binary legal question.

Lincoln Fin. Sec. Corp. v. Foster et al., No. 3:20-cv-01132-VLB (D. Conn. Oct. 20, 2020).

Second Circuit Affirms Arbitration Award of Over $2M in Fees to Prevailing Party

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EB Safe commenced arbitration proceedings against Mark Hurley arising out of a business dispute. The arbitrators ruled in Hurley’s favor and awarded him expenses and attorneys’ fees totaling more than $2 million. A New York district court subsequently denied EB Safe’s petition to vacate the award and granted Hurley’s cross-petition to confirm. On appeal, EB Safe argued the award should have been vacated because it was in manifest disregard of the law and/or because Hurley procured the award by fraud through committing perjury at the arbitration.

The Second Circuit disagreed in both respects, noting first that the “manifest disregard of the law” standard is limited only to the “exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent.” EB Safe claimed that in deciding Hurley’s fee request, the arbitrators failed to apply the “reasonableness” standard required by Delaware law. But the court found no basis for the argument in the record, and thus found it was properly rejected by the district court. In addition, despite inconsistencies in Hurley’s arbitration testimony, the court found EB Safe failed to meet the burden for vacating an award purportedly procured by fraud. Because the inconsistencies could have been equally attributable to confusion, mistake, or faulty memory, the court found EB Safe failed to show clear proof of “willful intent to provide false testimony.” As such, the Second Circuit affirmed the district court order in its entirety.

EB Safe, LLC v. Hurley, 19-cv-3859 (2d Cir. Oct. 20, 2020)

Ninth Circuit Affirms Denial of DIRECTV’s Motion To Compel Arbitration, Creating Circuit Split on Procedure for Determining Scope of Arbitration Agreements

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The plaintiff had filed a class action alleging that DIRECTV made calls to his cell phone in violation of the Telephone Consumer Protection Act. DIRECTV attempted to compel arbitration by relying on an agreement that the plaintiff had signed with AT&T Mobility, which had become an affiliate of DIRECTV subsequent to the formation of the agreement. The agreement included an arbitration clause extending to “all disputes and claims between” the plaintiff and AT&T Mobility, “includ[ing], but … not limited to … claims arising out of or relating to any aspect of the relationship between” them. As defined in the contract, AT&T Mobility also included its “affiliates.”

The Ninth Circuit explained that the proper procedure for interpreting the arbitration agreement at issue was first to determine whether a valid agreement was formed between the plaintiff and the party attempting to compel arbitration, i.e., DIRECTV. Relying on California law, the Ninth Circuit approved the district court’s holding that, at the time of the arbitration agreement, the reasonable expectation of the parties would not have considered DIRECTV to be included as an affiliate of AT&T Mobility. The Fourth Circuit, in contrast, would have determined whether the arbitration agreement was formed between the plaintiff and the party named in the arbitration agreement (AT&T Mobility), and then would have determined whether the scope of that agreement would include the party seeking to compel arbitration (DIRECTV).

The Ninth Circuit supported its view by reasoning that its approach avoids an “absurd result,” which it must avoid under the California rules of contract interpretation. In so doing, the court distinguished the U.S. Supreme Court’s Lamps Plus decision, which held that the “contra proferentem” rule of contract interpretation was preempted by the FAA.

Revitch v. DIRECTV, LLC, Case No. 18-16823 (9th Cir. Sept. 30, 2020).

Court Denies Motion To Compel Arbitration and To Appoint Arbitrators Where Parties Had Agreed To Arbitrate and There Was No Impasse

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In a case where both the plaintiffs and the defendant agreed the matter should be arbitrated, the Southern District of Ohio refused to compel arbitration and denied the plaintiffs’ motion for the appointment of arbitrators. The parties’ contract provided for arbitration before the American Arbitration Association, but the AAA declined to administer the arbitration because the defendant “failed to comply with the AAA’s policies regarding consumer claims.” Both parties were amenable to private arbitrations, but they could not agree whether the arbitration should be conducted individually or as one consolidated arbitration. As a result, the plaintiffs argued that the parties had reached an impasse and requested that the court either compel arbitration or appoint arbitrators.

The court first held that a party may not seek to compel arbitration under Section 4 of the FAA “where there has been no refusal to arbitrate.” “A party has ‘refused to arbitrate’ within the meaning of Section 4 if it commences litigation or is ordered to arbitrate the dispute by the relevant arbitral authority and it fails to do so.” The court denied the motion to compel arbitration under Section 4 because it found that the defendant had not unequivocally refused to arbitrate. Rather, the defendant expressly acknowledged the agreement to arbitrate, and the parties were working together to select arbitrators, but had so far failed to agree. Although the parties had not been able to agree on arbitrators for more than a year, the court found that some of this delay was attributable to the plaintiffs’ change in position regarding consolidated arbitration.

With regard to the plaintiffs’ motion for appointment of arbitrators, the court noted that the FAA “expressly favors the selection of arbitrators by parties rather than courts[, however,] Congress recognized that judicial intervention may be required in certain circumstances.” Section 5 of the FAA provides for the appointment of arbitrators “if for any [ ] reason there shall be a lapse in the naming of an arbitrator.” For purposes of Section 5, a “lapse” has been defined as “a lapse in time in the naming of the arbitrator … or some other mechanical breakdown in the arbitrator selection process.” Several courts have found such a “lapse” to have occurred where the parties have deadlocked with regard to the appointment of arbitrators or the process pursuant to which the appointments should be made. Here, despite the one-year delay, the court found that no deadlock had occurred, as the parties both agreed that they were amenable to private arbitration and the names of specific arbitrators had been exchanged. In addition, the AAA had informed the parties that it would consider accepting the arbitration if the defendant took certain steps.

As a result, the court found that it lacked jurisdiction under Section 4 to compel arbitration and under Section 5 to appoint arbitrators, and dismissed the action without prejudice.

Allen v. Horter Investment Management, LLC, Case No. 1:20-cv-11 (S.D. Ohio Sept. 30, 2020).