Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

First Circuit Affirms Order Compelling Arbitration and Rejecting Claim By Postmates Couriers of Exemption From the FAA

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In Damon Immediato, et al., v. Postmates, Inc., the First Circuit addressed the issue of whether couriers who deliver goods from local restaurants and grocery stores are “transportation workers engaged in interstate commerce such that they are exempt from the Federal Arbitration Act.”  The court affirmed the district’s court’s decision granting defendant’s motion to compel arbitration and concluding that the plaintiffs were not exempt from the FAA.

The defendant, Postmates, operates an online platform that allows customers to order local takeout and certain products from local grocery stores. Plaintiffs are couriers for Postmates who made deliveries to customers in the Boston area. When plaintiffs registered as couriers, they were required to accept Postmates “Fleet Agreement” which, among other things, classifies the couriers as independent contractors and includes a mutual arbitration provision governed by the FAA. The arbitration provision requires all disputes be resolved through final and binding arbitration under AAA Rules, but allows a courier to opt-out of the arbitration provision within 30 days of accepting the Fleet Agreement. Plaintiffs did not opt out of the arbitration provision.

Plaintiffs filed an action in Massachusetts state court on behalf of themselves and a putative class of couriers, alleging Postmates misclassified them as independent contractors and, as employees, they were entitled to benefits such as reimbursement of business expenses, the payment of a minimum wage, and paid sick leave.  Postmates removed the action to federal court and moved to compel arbitration. Plaintiffs opposed the motion contending they were exempt from the FAA under 9 U.S.C. §1. The district court determined the exemption did not apply, granted Postmates’ motion to compel arbitration, and stayed the federal action pending the outcome of the arbitration. Plaintiffs accepted individual offers of judgment in the arbitration and the district court dismissed the case.

On appeal, the plaintiffs argued they “belong to a class of workers encompassed by the residual clause of section 1 and are therefore outside the grasp of the FAA.”  Section 1 of the FAA provides, in part, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The court noted, however, that the Supreme Court “has interpreted the residual clause of this exemption to apply only to ‘transportation workers,’ meaning workers who play a ‘necessary role’ in the interstate transport of goods.” [Citation omitted]. The court rejected plaintiffs’ argument, concluding “couriers who deliver meals and goods as the result of local purchases from local vendors are not within a class of workers ‘engaged in foreign or interstate commerce’ who are exempt from the FAA under section 1.” Plaintiffs also contended on appeal if they are not exempt from the FAA under section 1, then their contracts with Postmates must be outside the coverage of section 2 of the FAA, “which extends the FAA’s reach to all contracts ‘involving’ interstate commerce. 9 U.S.C. §1, 2.” The court rejected this argument as well, concluding “appellants’ employment contracts are covered under section 2 of the Act because couriers who make local retail deliveries affect interstate commerce, but those contracts are not exempt under section 1 because the appellants are not part of a class of workers actively engaged in the interstate transport of goods. The district court was therefore required to compel arbitration according to the terms agreed to by the parties.”

Damon Immediato, et al, v. Postmates, Inc., No. 22-1015 (1st Cir. Nov. 29, 2022)

Second Circuit Rejects Application of the Functus Officio Doctrine and Affirms District Court’s Order Denying Petition To Vacate Arbitration Award and Granting Cross-Petition to Confirm Award

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In Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Ltd., et al., the Second Circuit affirmed the district court’s order denying Smarter Tools, Inc.’s (STI) petition to vacate an arbitration award and granting Chongqing Seni Import & Export Trade Co. Inc. and Chongqing AM Pride Power and Machinery Co., Ltd.’s (collectively, SENCI) cross-petition to confirm the award.

STI is engaged in the business of buying and selling tools and power products. SENCI produces and sells gas-powered generators. STI and SENCI entered into contracts for STI’s purchase of thousands of generators from SENCI. The purchase orders for the generators included an arbitration provision “providing that any dispute arising from the contracts would be resolved by arbitration, to be conducted in New York City under the International Commercial Dispute Resolution Procedure of the American Arbitration Association.” After disputes arose between the parties regarding the generators, SENCI initiated arbitration to collect amounts due from STI. STI filed a counterclaim contending that several of the generators were defective and failed to comply with applicable state and federal regulations, resulting in damages to STI. The parties agreed the arbitrator should provide a reasoned award. After the hearing, the arbitrator rendered an award, which (i) included a brief description of the proceedings, (ii) excluded the testimony of STI’s expert witness and five exhibits related to that testimony, and (iii) included two findings. The arbitrator awarded SENCI approximately $2.4 million and denied all of STI’s claims against SENCI.

STI filed a petition to vacate the arbitration award contending it was not a “reasoned award” as required, and that the arbitrator “manifestly disregarded the law.” SENCI filed a cross-petition to confirm the award. The district court found the arbitrator’s award did “‘not meet the standard for a reasoned award because it contains no rationale for rejecting STI’s claims’” and “‘the arbitrator exceeded his authority in issuing an award that does not meet the standard of a reasoned opinion.’” The district court remanded the matter to the arbitrator for clarification of his findings. The arbitrator then issued a final amended award providing the same relief for the parties, but also including a further explanation of why STI’s counterclaims failed. STI again moved to vacate the amended award, and SENCI moved to confirm the award. The district court found the arbitrator’s amended award provided sufficient details to constitute a reasoned award and granted SENCI’s cross-petition to confirm the award and denied STI’s petition to vacate.

In affirming the district court’s order, the Second Circuit first noted the opinion in Porzio v. Dresdner, Kleinwort, Benso, N. Am., LLC, 497 F.3d 133 (2d Cir. 2007) confirming the “extremely deferential standard of review” that should be applied in reviewing arbitral awards “[t]o encourage and support the use of arbitration by consenting parties.” The court noted “‘[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The court then rejected STI’s argument that the doctrine of functus officio barred the district court from remanding the matter to an arbitrator for a reasoned award. The doctrine of functus officio provides “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parities, to redetermine those issues”. The court found “where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.”

The court also rejected STI’s argument that vacatur was mandated under the FAA. The court held that “applying the strong presumption in favor of enforcing an arbitration award, the arbitrator’s failure to render a reasoned award does not fall within a narrow reading of Section 10(a)(4) and did not require vacatur of the original award.” The court found “where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award ‘imperfect in matter of form not affecting the merits of the controversy.’ 9 U.S.C. §11(c).” Finally, the court rejected STI’s claim that the district court also erred in not finding the arbitrator acted in “manifest disregard of the law” finding those claims groundless.

Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Inc., et al., No. 21-724 (2d Cir. Jan. 17, 2023)