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The Sixth Circuit has affirmed an order vacating an arbitration award, agreeing with the district court that the mandatory arbitration clause at issue was unenforceable upon termination of the agreement in which it was contained.

The plaintiff, Gridsmart Technologies, Inc. (“Gridsmart”), manufactured camera equipment that it sold to the defendant, Marlin Controls, Inc. (“Marlin”). The parties had an agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined region of the United States (the “Agreement”). An arbitration clause in the Agreement required the parties to submit all disputes arising under it to the American Arbitration Association.

Gridsmart exercised its right to terminate the Agreement in June 2015. Thereafter, the parties tried to reconcile the handling of outstanding orders that Gridsmart first delivered to Marlin in September 2015. Marlin ultimately returned these items to Gridsmart, claiming it was unable to sell them due to a lost construction contract. Gridsmart nevertheless demanded payment for the items and Marlin refused. Gridsmart filed an arbitration claim to resolve the issue, but Marlin did not participate. As such, the arbitrator granted an award in favor of Gridsmart, which Gridsmart then sought to enforce against Marlin in a Tennessee state court action.

Marlin removed the enforcement action to district court and moved to have the award vacated. The district court granted the motion, finding that the arbitration clause in the Agreement did not survive after it was terminated by Gridsmart in June 2015. The Sixth Circuit affirmed. Under the plain language of the Agreement, the Court found it was clear that the parties’ rights as to orders outstanding upon termination were to be governed by a separate “mutual agreement.” No such agreement existed here. The Court ruled that, absent a separate contract concerning the handling of outstanding orders, it was equally clear that the parties rights under the Agreement with respect to such orders – including the right to enforce the arbitration clause – immediately ceased when the Agreement was terminated in June 2015.

The Court held that Tennessee Uniform Commercial Code demanded the same conclusion. It provided that when, as here, a party terminates a contract for the sale of goods, all executory obligations on both sides are “discharged.” Moreover, after finding that Gridsmart waived additional contractual interpretation arguments, the Court went on to reject them in dicta. It held that the presence of “survival” language in certain other provisions of the Agreement – but not in the arbitration clause – plainly demonstrated that the parties did not intend for the arbitration clause to survive upon termination of the agreement.

Gridsmart Technologies, Inc. v. Marlin Controls, Inc., No. 17-5121 (6th Cir. July 20, 2017).

This post written by Alex Silverman.
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The question presented was whether the arbitrator had the authority to certify a class that included absent class members, i.e., employees other than the named plaintiffs and those who have opted into the class. Finding the district court improperly relied on Jock v. Sterling Jewelers, Inc., 646 F.3d 113, 124 (2d Cir. 2011) (“Jock I”), the law of the case did not conclusively resolve this question. The Court also distinguished Justice Alito’s concurrence in Oxford Health Plans LLC v. Sutter, 133 S.C.t. 2064, 2066 (2013), as the case did not speak to whether an arbitrator has authority to certify a class containing absent class members. The Second Circuit vacated and remanded for further consideration of the issue of whether the arbitrator exceeded her authority in certifying a class that contained absent class members who have not opted in.

Jock et al. v. Sterling Jewelers, Inc., No. 15-3947 (2d Cir. July 24, 2017)

This post written by Nora A. Valenza-Frost.
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The Second Circuit has found that Spencer Meyer, a customer of Uber, was provided “reasonably conspicuous” notice of Uber’s Terms of Service to which he “unambiguously manifested assent” when he created an Uber account, such that he was contractually bound under California law by an arbitration clause contained in those terms of service.

Meyer filed a putative class action against Uber’s then-CEO Travis Kalanick alleging that the Uber app enabled third-party drivers to engage in illegal price fixing. Kalanick joined Uber as a necessary party, and Uber and Kalanick filed motions to compel arbitration based on an arbitration provision in Uber’s Terms of Service. The district court denied these motions, finding that Meyer did not have reasonably conspicuous notice of the Terms of Service and did not unambiguously manifest assent to those terms, including the arbitration agreement.

The Second Circuit disagreed. In its opinion, the court focused on the particular process that Meyer went through to create his Uber account. This process required Meyer to click a button labeled “Register,” directly below which was stated: “By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY,” with the phrase “TERMS OF SERVICE & PRIVACY POLICY” highlighted in blue, underlined, and containing a hyperlink to the full Terms of Service. The Court found it significant that this link to the Terms of Service was both “spatially coupled” with the Register button, as it was directly below this button on the screen, and “temporally coupled” with the registration process, as it appeared just as the customer was registering. Thus, the Court found that a “reasonably prudent smartphone user would understand that the terms were connected to the creation of a user account,” and that a reasonable user would know that he was agreeing to these terms by clicking the Register button. Thus, the court found that the requirements of reasonably conspicuous notice and unambiguous assent were satisfied for Meyer to be bound by the arbitration provision. However, the Court remanded the matter so that the district court could consider an issue not decided by the district court: whether Uber and Kalanick waived their right to arbitrate by actively participating in the litigation prior to filing their motion to compel.

Meyer v. Uber Technologies, Inc., et al., Nos. 16-2750-cv and 16-2752-cv (2d Cir. Aug. 17, 2017)

This post written by Jason Brost.

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In the latest opinion arising from a coverage dispute following MF Global Holdings’s bankruptcy, the Bankruptcy Court in the Southern District of New York sent the dispute to arbitration in Bermuda pursuant to the underlying E&O insurance policy’s binding arbitration provision. To begin, the court laid out the four step process by which bankruptcy courts decide motions to compel arbitration: (1) whether the parties agreed to arbitrate; (2) how broad the arbitration agreement is; (3) if federal statutory claims are involved, did Congress intend those claims to be non-arbitrable; and (4) if not all claims are arbitrable, should the balance of proceedings be stayed pending arbitration?

First, the court interpreted the E&O policy as requiring the parties to arbitrate the coverage dispute in Bermuda. Second, the court read the arbitration clause broadly, covering “any and all” disputes arising under the policy.  Third, the court undertook a comprehensive analysis to conclude that Congress did not intend to exclude the dispute from arbitration.  In determining whether the policy presumption in favor of arbitration was outweighed by federal interests embodied in the Bankruptcy Code, the court considered whether the disputed issue was “core” or “non-core” to the bankruptcy proceeding.  “Core” issues are those arising under the Bankruptcy Code or arising in bankruptcy cases, while “non-core” issues are those merely related to bankruptcy cases.  Core issues can override the arbitration presumption, but non-core issues do not and the Bankruptcy Court must refer the claims to arbitration.  For core issues, courts should enforce arbitration provisions unless doing so would seriously jeopardize the objectives of the Bankruptcy Code.

Here, the court found the coverage dispute at issue was non-core. Recovery under the E&O policy is not the most important asset of the estate, nor is it the sole source of recovery, and there is no pay-first provision at issue.  And, contrary to the plaintiff’s assertions, resolution of the dispute does not require interpretation of the court’s previous orders and thus does not impact the arbitral panel’s ability to accurately decide the issues.  Furthermore, arbitration does not conflict with the Bankruptcy Code’s objectives or overarching policy; the dispute relates to the parties’ pre-petition relationship and does not depend on rights created under the Code.  Thus, the court found the strong federal policy in favor of arbitration outweighs the federal interests in the Bankruptcy Code.

Finally, the court stayed the proceedings pending the arbitration. Because the insurer has posted a required $15 million bond, the court found plaintiff’s ability to recover against that bond mandates a stay of proceedings rather than dismissal pending the arbitral outcome.  In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Aug. 24, 2017).

This post written by Thaddeus Ewald .
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The court was petitioned to appoint an umpire when the arbitrators appointed by the litigants – an insurer and certain insureds – failed to do so. The insureds opposed the petition, arguing that the party arbitrators should be ordered to select one of the candidates that the arbitrators had been proposing. The arbitration agreement stated, however, that “if the two arbitrators fail to agree on a third party arbitrator within 30 days of their appointment, [then] either party may make application to a court of competent jurisdiction in . . . New York.” Section 5 of the FAA also directs the district court to “designate and appoint an arbitrator . . . or umpire, as the case may require,” following “a lapse in the naming of an arbitrator . . . or umpire.” The court thus held that the arbitration agreement and the FAA authorized the court to appoint an umpire.

The court then considered the field of proposed candidates, and selected one of the individuals proposed by the insurer. The court rejected the insureds’ argument that the selected umpire was likely to be partial to the insurer due to his certification by ARIAS (which, according to the insureds, could be biased towards insurance companies). The court found that the insureds’ candidates were less qualified in that they did not have any personal experience serving as an arbitrator or as an umpire. The insurer’s candidates, in contrast, had previously served as umpires in numerous arbitrations. The court selected the most experienced candidate among the group proposed by the insurer, explaining that, while certification with a particular organization or specific arbitration experience is not required to serve as an umpire, “reason dictates” that those credentials should be determinative. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Beelman Truck Co., Case No. 17-CV-2946 (USDC S.D.N.Y. July 17, 2017).

This post written by Gail Jankowski.
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