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Ninth Circuit Affirms Order Vacating Arbitration Award, Faults Arbitrator’s Disregard of Contract’s Plain Language

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The Ninth Circuit recently affirmed a district court order vacating an arbitration award arising from the termination of subcontracts for the construction of army buildings and facilities in Afghanistan. Defendants ECC Centcom Constructors, LLC and ECC International, LLC (together, “ECC”) had two prime contracts with the U.S. Army Corps of Engineers (“USACE”) for the construction of army buildings and facilities in two provinces in Afghanistan. ECC in turn awarded two subcontracts to Aspic Engineering and Construction Company (“Aspic”) for the completion of those projects. Relevant to this dispute, the subcontracts incorporated many Federal Acquisition Regulation (“FAR”) clauses by reference, including those governing termination for convenience, and mandated that Aspic owe to ECC the same obligations that ECC owed to the United States government.

After USACE terminated ECC’s prime contracts for convenience, ECC and Aspic could not agree on a termination settlement amount for both contracts, particularly after USACE refused to pay for any of Aspic’s claimed termination costs. ECC and Aspic proceeded to arbitration to resolve the termination of both subcontracts, and the arbitrator awarded Aspic just over $1 million. Although the award was initially confirmed in California state court, a California federal court later vacated the award, reasoning that it conflicted with contract language. The federal court reasoned that the arbitrator “voided and reconstructed parts of the Subcontracts based on a belief that the Subcontracts did not reflect a ‘true meetings [sic] of the minds.’” Aspic appealed, and the Ninth Circuit framed the issue as “whether the Arbitrator exceeded his powers in finding that Aspic need not comply with the FAR provisions.”

The Ninth Circuit affirmed the district court’s order vacating the award. Specifically, it took issue with the arbitrator’s reasoning that “[t]here was not a true meeting of the minds when the subcontract agreements were entered. Hence, ASPIC was not held to the strict provisions of the subcontract agreements that ECC had to the USACE.” In so finding, the Panel reasoned, “[w]hen an arbitrator disregards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.” Specifically, it found that the arbitrator’s award in this case was “irrational” because it “directly conflicted with the subcontracts’ FAR-related provisions, without evidence of the parties’ past practices deviating from them, in order to achieve a desired outcome.”

Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors, Case No. No. 17-16510 (9th Cir. Jan. 28, 2019).

Private Arbitrators Do Not Qualify as a “Tribunal” under 28 U.S.C. § 1782

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Section 1782 allows a district court to order a person who resides in the court’s district to provide testimony or documents to be used in a proceeding before a foreign tribunal. When presented with a section 1782 discovery application, a district court must engage in two inquiries: first, whether the court has authority to grant the application, and second, whether to exercise its discretion to grant the application. As part of the first inquiry, the court must determine whether the foreign body conducting the arbitration qualifies as a “tribunal” under section 1782.

Since the United States Supreme Court decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), courts have split on whether private arbitral bodies qualify as a tribunal for purposes of section 1782. In Intel, the Supreme Court discussed the definition of “tribunal” in dicta. A number of courts have relied on this discussion for the proposition that private arbitrations are covered by section 1782. However, in two pre-Intel cases, the Second and Fifth Circuits held that section 1782 does not apply to private arbitrations. Some district courts have stuck to the pre-Intel rule, noting that Intel does not necessarily extend the reach of section 1782 to purely private arbitrations. Of particular note, the Supreme Court’s discussion in Intel did not actually specify whether the term tribunal, as used, in section 1782, included private arbitrations, in addition to state-sponsored arbitrations, or if it only included the latter.

The District Court for South Carolina recently sided with the courts holding that Intel did not expand the scope of section 1782 to apply to purely private arbitrations. As such, the court relied on the Second and Fifth Circuit opinions, which were squarely on point. Those cases noted that “references in the United States Code to ‘arbitral tribunals’ almost uniformly concern an adjunct of a foreign government or international agency” as well as the “silence” of section 1782’s legislative history with regard to whether Congress intended such a “significant … expansion of American judicial assistance to international arbitral panels created exclusively by private parties. . . .” As a result, the court determined that parties to an arbitration before a foreign, private arbitral body may not utilize section 1782 to obtain testimony or documents for use in the foreign arbitration.

However, the court’s determination has been appealed to the Fourth Circuit, so watch this space for further developments.

In re: Servotronics, Inc., Case No. 2:18-mc-00364-DCN (USDC D.S.C. Nov. 6, 2018) (Order);
In re: Application of Servotronics, Inc., Case No. 2:18-mc-00364-DCN (USDC D.S.C. Nov. 30, 2018) (Notice of Appeal).

Second Circuit Holds Arbitration Clause Found in Hyperlink in a Confirmation Email Unenforceable

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SquareTrade, Inc. (“SquareTrade”) sells protection plans for consumer products. Adam Starke (“Starke”) purchased a SquareTrade plan from Amazon to cover a CD player ordered from Staples. When Starke’s CD player broke he made a claim for coverage under the protection plan. SquareTrade informed Starke that the CD player was not covered under the protection plan because the plan only applied to products purchased at Amazon. Starke filed this putative class action, seeking to hold SquareTrade accountable for alleged violations of consumer protection laws. SquareTrade moved to compel arbitration, contending that its contract with Starke included an arbitration clause. The arbitration provision first appeared in a “terms and conditions” document provided via hyperlink in a confirmation email sent to Starke after the purchase of the SquareTrade protection plan on Amazon.

The United States Court of Appeals for the Second Circuit affirmed the decision of the district court, holding that the arbitration provision did not become part of the contract because Starke did not have reasonable notice of and manifest his assent to it. The court reached this decision by applying traditional concepts of contract law. The court explained that where an offeree does not have actual notice of certain contract terms, he is nevertheless bound by such terms if he is on inquiry notice of them and assents to them through conduct that a reasonable person would understand to constitute assent. New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. Specifically in the context of web-based contracts, courts look to the design and content of the webpage to determine if the offeree would be put on inquiry notice of such terms.

The court determined that Starke did not have reasonable notice of the arbitration provision which was only in the Post Sale Terms & Conditions (“Post Sale T&C”) provided in the confirmation email. Starke received a chain of confirmation emails from Amazon and then SquareTrade, none of which put him on notice that his “Service Contract” would come in a hyperlink. The email from SquareTrade that contained the hyperlink containing the Post Sale T&C was cluttered and mostly devoted to other information about the details of the protection plan. The email contained diverse text, displayed in multiple colors, sizes and fonts, and features various buttons and promotional advertisement that divert the reader’s attention from the hyperlink. And the hyperlink itself was in small font. The SquareTrade email did not direct Starke to click on the link in any way and did not make him aware that the link contains contract terms to which he would be deemed to agree. The court notes that SquareTrade could have easily included the hyperlink on the Amazon purchase page. Starke had no way to review the Post Sale T&C until after he received the SquareTrade confirmation email.

The court notes that even though SquareTrade provided Starke with 30 days to return the protection plan for a refund, which is in compliance with New York law, there is no justification here for providing contract terms after a transaction. Additionally, the court notes that although Starke had transacted with SquareTrade before, the prior transaction similarly did not give Starke clear and conspicuous notice of the arbitration clause. Therefore, the court held that there was no enforceable agreement to arbitrate.

Starke v. SquareTrade, Inc., No. 17-2474-cv (2d. Cir. Jan. 10, 2017).

Fourth Circuit Compels Arbitration Over “Gateway” Issues Of Arbitrability

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This case involved a consumer, Charleene Novic, who obtained a credit card from Credit One. The card holder agreement contained an arbitration clause that stated “[c]laims subject to arbitration include … disputes related to … enforceability or interpretation of this Agreement.” After Novic accrued a past-due balance, Credit One sold the account to a debt collector. Novic claimed that the past-due balance was the result of fraudulent charges. The debt collector sued Novic in Maryland state court regarding the outstanding balance, and the Maryland court ruled in favor of Novic. Novic then initiated an action against Credit One in Maryland state court, alleging violations of the Fair Credit Reporting Act by failing to conduct a reasonable investigation of her claim that she did not owe the past-due balance. The action was removed to federal court. Credit One moved to compel arbitration under the terms of the card holder agreement. The Maryland district court denied the motion to compel, finding that Credit One lost its right to compel arbitration after it assigned Novic’s account for collection. Credit One appealed to the Fourth Circuit, arguing that an arbitrator should decide the “gateway” issue of whether Novic’s claims are subject to arbitration.

The Fourth Circuit agreed with Credit One. The Court noted that parties may consent to arbitrate the gateway issue of arbitrability, which allows the arbitrator, rather than the courts, to determine the arbitrator’s jurisdiction. The Court, however, noted that any delegation of the issue of arbitrability must be set out in “clear and unmistakable” language in the parties’ agreement. With respect to the arbitration clause at issue, the Fourth Circuit then concluded that it “unambiguously require[d] arbitration of any issues concerning the ‘enforceability’ of the arbitration provisions entered into by the respective parties.” Thus, the Fourth Circuit vacated the Maryland district court’s judgment and remanded to the district court for entry of a stay of court proceedings and for an order compelling arbitration.

Novic v. Credit One Bank, No. 17-2168 (4th Cir. Jan. 4, 2019).

11th Circuit Compels Arbitration Despite Allegation that Arbitration Agreement was Procedurally and Substantively Unconscionable

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This case involves a dispute between American Family Life Assurance Company of Columbus (“Aflac”) and a group of independent contractors (“associates”), arising out of alleged misrepresentations by Aflac. Pursuant to their contracts with Aflac, the associates agreed to arbitrate any claims against the company, and after learning of the associates’ plans to file a class action, Aflac filed a motion to compel arbitration in Georgia state court. In response, the associates removed the case to federal court and sought to void the arbitration agreement by arguing that it was procedurally and substantively unconscionable.

Specifically, the associates argued that (1) they did not have a sufficient opportunity to review the arbitration provision before executing the agreement, (2) that the agreement was one-sided because it required the associates to arbitrate claims against Aflac, but did not include the same requirement for Aflac, and (3) the costs and fees to be paid by the associates were so great that it would effectively deny the associates a forum to bring their claims. The district court for the Middle District of Georgia found these arguments unavailing and entered an order compelling arbitration.

The associates moved for reconsideration, but were denied. On appeal, the Eleventh Circuit reviewed the district court’s order to compel arbitration de novo. However, the court’s analysis did not progress past the associates’ failure to produce any evidence in support of their unconscionability claims at the briefing and hearing stage. For some of their arguments, the Eleventh Circuit noted that even if the associates had produced evidence, Georgia law governing mutuality of remedies and confidentiality provisions in arbitration agreements still would not support a finding that the agreement was unconscionable. As such, the panel affirmed the district court’s judgment compelling arbitration and denying the motion for reconsideration.

American Family Life Assurance Co. of Columbus v. Hubbard, et al., No. 18-11869 (11th Cir. Jan. 7, 2019).