Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Non-signatory Third-Party Cannot Enforce Arbitration Clause in Contract

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SBS is a staffing company that provides personnel to various retail services, such as SPAR. SBS engaged Paradise Hogan (“Hogan”) and assigned Hogan to SPAR. Hogan and SBS entered into an Independent Contractor Master Agreement with SBS (the “Agreement”). The Agreement required the parties to resolve disputes through arbitration; SPAR was not a party to the Agreement. Hogan later sued SBS and SPAR for unpaid wages and benefits and both SBS and SPAR sought to compel arbitration. The district court compelled arbitration as to Hogan’s claims against SBS but denied the motion to compel arbitration as to SPAR. SPAR appealed.

The First Circuit affirmed holding that there was no legal basis to compel Hogan to arbitration where the clear terms of the agreement showed that Hogan did not consent to arbitrate his claims against SPAR. The Court explains that SPAR was not a third-party beneficiary of the Agreement. To determine if a party is a third-party beneficiary a court looks to the specific terms of the contract to ascertain the intent of the parties. Here, the court explained that the clear language of the arbitration clause limited its applicability to the signatories by only covering disputes between “the Parties,” so it is clear that it did not confer arbitration rights to SPAR or any other third party. Moreover, the court determined that Hogan was not equitably estopped from avoiding arbitration of his claims against SPAR. Federal courts have been willing to estop a signatory from avoiding arbitration with a non-signatory when the issues to resolve in arbitration are intertwined with the agreement that the estopped party has signed. The court explained that Hogan’s claims were based upon Massachusetts wage and hour law and not the Agreement and therefore, not sufficiently intertwined.

Hogan v. Spar Group, Inc., No. 18-1286 (1st Cir. Jan. 25, 2019)

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).