Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Massachusetts Supreme Court Holds That Uber’s Registration Process Did Not Provide Reasonable Notice of Terms and Conditions and That Arbitration Was Therefore Improper

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The Massachusetts Supreme Judicial Court recently held that Uber’s notification of its “terms and conditions” during the registration process for its app did not provide “reasonable notice” to users of Uber’s terms, that there was therefore no valid contract between Uber and the users who were suing it, and that arbitration that had occurred had therefore been improper.

The Kauders sued Uber in Massachusetts Superior Court claiming, among other things, that it had unlawfully discriminated against Mr. Kauders on the basis of his disability because three Uber drivers refused to give him rides because he is blind and was accompanied by a guide dog.

Uber moved to compel arbitration under its terms and conditions. The court granted Uber’s motion and the parties arbitrated the case. The arbitrator ruled in favor of Uber.

Shortly thereafter, the First Circuit held, in a different case against Uber, that “Uber’s registration process did not create a contract because it did not provide reasonable notice to users of the terms and conditions” and there was “no enforceable contract requiring arbitration.”

In the Kauders litigation, Uber then moved to confirm the arbitration award. At the hearing on that motion, the Kauders raised the First Circuit’s decision and subsequently moved for reconsideration of the court’s decision compelling arbitration. The court granted that motion in light of the First Circuit’s decision and denied Uber’s motion to confirm. Uber appealed.

The Massachusetts Supreme Court agreed with the First Circuit and the Kauders that Uber’s registration process did not provide reasonable notice of its terms and conditions.

Uber argued that (1) the trial court lacked authority to deny its motion to confirm because the Kauders “failed to move to vacate the award within thirty days”; (2) the Kauders’ motion for reconsideration was untimely and improper “because there was no change in fact or law”; and (3) Uber’s registration process created a valid, enforceable contract requiring arbitration.

The Supreme Court rejected Uber’s argument about the Kauders’ failure to move to vacate the award, explaining that, unlike federal law, it “d[id] not consider participation in the arbitration process as requiring revisitation of the arbitrability issue within the thirty-day time period.”

Although the Supreme Court agreed with Uber’s argument that it was an abuse of discretion for the trial court to grant the Kauders’ motion for reconsideration, it declined to remand the case to require the trial court to confirm Uber’s arbitration award because “the issue of arbitrability would [still] be preserved for appeal” and the Kauders “would then undoubtedly appeal on that ground, and the case would be right back before” the Supreme Court.

Applying a “two-prong test” asking “whether there is reasonable notice of the terms and a reasonable manifestation of assent to those terms,” the court determined that Uber’s terms of service did not create a valid contract. When the Kauders created user accounts, a link to Uber’s “terms and conditions” was on the bottom of the third screen they saw during the registration process. The screen stated: “By creating an Uber account, you agree to the Terms & Conditions and Privacy Policy.” “Terms & Conditions and Privacy Policy” was “in a rectangular box and in boldface font,” while the rest of the sentence in question was in ordinary type. The court described Uber’s “terms and conditions” as “extensive” and conferring broad indemnity on Uber.

The court concluded that Uber’s registration process did not provide “reasonable notice” of Uber’s “terms and conditions” under the circumstances, finding it significant that (1) “the interface did not require the user to scroll through the conditions or even select them,” even though Uber required its drivers to review its terms and conditions for drivers before registering to drive; (2) the notification about the “terms and conditions” was “oddly displayed,” with the important language notifying users that they were agreeing to something “being displayed less prominently than” the phrases “terms and conditions” and “privacy policy”; (3) the placement of the “terms and conditions” notification was on the “third screen” without any prior reference to the terms; and (4) the “title of the screen” and “the information on” it focused on payment, not conditions.

In sum, “the design of the interface for the app … enable[d], if not encourage[d], users to ignore the terms and conditions” and “[n]othing about [the] third screen … conveyed to a user that he or she should open a link that would reveal an extensive set of terms and conditions at the bottom of the screen.” “Instead of requiring its users to review [its] terms and conditions as it appear[ed] to do with its drivers, Uber ha[d] designed an interface that allow[ed] the registration to be completed without reviewing or even acknowledging the terms and conditions.” Thus, Uber “failed to show that it provided the [Kauders] with reasonable notice.”

There was therefore “no enforceable agreement between Uber and the [Kauders], and therefore the dispute [in this case] was not arbitrable.” Accordingly, the court remanded the case.

Kauders v. Uber Technologies, Inc., No. SCJ-12883 (Jan. 4, 2021).

West Virginia District Court Grants Summary Judgment in Favor of Insurer Following Denial of Policyholder’s Mine Subsidence Claim

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In January 2019, a policyholder sued Westfield Insurance Co. after the insurer denied coverage for property damage that the policyholder believed to have occurred as a result of mine subsidence, and therefore covered under a mine subsidence endorsement to his homeowners insurance policy. The policyholder alleged that the insurer’s denial constituted a breach of contract and also alleged that the insurer violated the West Virginia Fair Trade Practices Act, as well as the implied covenant of good faith and fair dealing.

After denying Westfield’s initial motion for summary judgment on the pleadings, the insurer renewed its motion after additional evidence on the evaluation of the policyholder’s mine subsidence claim had been introduced. The court thereafter granted summary judgment in favor of Westfield. It reasoned that because mine subsidence claims – including the investigation and subsequent decision whether to pay such claims – are entirely within the purview of the West Virginia Board of Risk and Insurance Management (BRIM) as a matter of statute, Westfield was merely acting as an agent of the state and was bound by BRIM’s decision. As such, while Westfield was required by statute to include the mine subsidence endorsement in its insurance policies, it had no authority to decide whether the policyholder’s claim was paid.

In this matter, the record demonstrated that (1) the policyholder submitted a claim for mine subsidence damage to Westfield; (2) Westfield referred the matter to BRIM as it was statutorily required to do so; and (3) BRIM conducted its independent investigation of the matter and determined that the claim would not be paid. Under these circumstances, the court determined that Westfield could not be found to have breached its contract with the policyholder for an adverse decision rendered exclusively by BRIM as required by applicable statute, and granted summary judgment as a result.

Once summary judgment was granted on the breach of contract claim, the policyholder’s remaining claims were similarly dealt with. For example, West Virginia law does not recognize an independent cause of action for the breach of an implied covenant of good faith and fair dealing separate and apart from a breach of contract claim. Having found no breach of contract, Westfield was entitled to summary judgment on the policyholder’s common law bad faith claim. Further, because the exclusive authority to investigate and determine mine subsidence claims rests with BRIM, it could not be established as a matter of law that Westfield’s failure to investigate the policyholder’s claim was misconduct, let alone misconduct with sufficient frequency as to indicate a general business practice (as required for an unfair trade practices claim).

London Court of Appeal Vacates and Remands Decision Blocking Transfer of Approximately 370K Annuity Policies

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A London Court of Appeal recently vacated and remanded a High Court’s decision precluding the approval of a deal to transfer approximately 370,000 annuities after concluding that the High Court made several errors in its analysis of the relevant factors in play.

Prudential Assurance Co. (PAC) and Rothesay Life PLC entered into a reinsurance agreement “to transfer the majority of the economic risk and reward of the annuity business covered by the agreement from PAC to Rothesay.” The “assets backing the annuity policies were transferred by PAC to Rothesay as part of the premium for the reinsurance.”

A separate business transfer agreement “contemplated that the parties would cooperate to achieve the actual transfer of th[e] business through” regulatory and court approval.

As part of the approval process, the parties asked the High Court of Justice of the Business and Property Courts in London “to sanction a scheme … providing for the transfer from PAC to Rothesay of some 370,000 annuity policies written by PAC” under the United Kingdom’s Financial Services and Markets Act 2000, which permits discretionary court approval of such schemes if “in all the circumstances of the case, it is appropriate to sanction the scheme.”

The High Court declined to approve the scheme. In short, the court did so because, among other things, (1) “Rothesay did not have the same capital management policies or the backing of a large well-resourced group” (in other words, PAC, which was part of the Prudential family, had much more support from its parent in the event of a financial crisis) and (2) “it had been reasonable, in the light of PAC’s sales materials, age and reputation, for policyholders to have chosen PAC on the basis of an assumption that it would not seek to transfer their policies” (in other words, policyholders selected PAC for its financial strength and reputation and reasonably believed that they would be dealing with PAC for the life of their annuities, which could be decades).

PAC and Rothesay appealed, and the Court of Appeal vacated and remanded.

In sum, the Court of Appeal held, among other things, that the High Court “ought not to have concluded that there was a material disparity between the non-contractual external support potentially available for each of PAC and Rothesay” (put differently, the court wrongly believed Rothesay had less support from its parent than PAC had from its parent) because the High Court “disregarded the opinion of [an independent] expert and the [Prudential Regulation Authority] as to [PAC’s and Rothesay’s] future financial resilience on the false basis that those opinions were themselves founded upon only a snapshot of the current year” when they were not.

Even putting that aside, the Court of Appeal explained that the theoretical availability of “non-contractual parental support” that the High Court felt would be provided by PAC’s parent (Prudential) to protect its reputation in the event of a financial crisis at PAC was irrelevant because it was not proper to “assume that any non-contractual parental support will be available in the future” because, among other things, “[p]arents can never be required to support their subsidiaries” and “parents of insurers are always at liberty to sell their regulated subsidiaries.” The independent expert had, in any event, concluded that the risk of either “PAC or Rothesay needing external support in the future was remote,” and the High Court failed to give that opinion proper weight.

Turning to the High Court’s analysis concerning the policyholders’ decisions and expectations, the Court of Appeal concluded that the High Court “ought not to have accorded any weight to the fact that the objecting policyholders chose PAC on the basis of its age, venerability and established reputation, and reasonably assumed that PAC would always provide their annuities” because such subjective considerations were irrelevant and the “only correct question was whether the transfer would have a material adverse effect on the security of their benefits.”

In re Prudential Assurance Co., No. [2020] EWCA Civ 1626 (Feb. 12, 2020).

Eleventh Circuit Holds University Cannot Arbitrate Student’s Breach of Contract and Misrepresentation Claims

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In Young v. Grand Canyon University, the Eleventh Circuit Court of Appeals held that the U.S. District Court for the Northern District of Georgia was wrong to compel arbitration of a student’s breach of contract and misrepresentation claims against a university, as federal regulation 34 C.F.R. § 685.300(e)-(f) prohibits a college or university that accepts federal student loan money from enforcing pre-dispute arbitration agreements when a student brings a “borrower defense claim.”

Plaintiff Donrich Young was enrolled in a doctoral degree program at Grand Canyon University in Arizona and took out federal loans to pay for the program. As part of Young’s admissions process, GCU required him to sign a comprehensive arbitration agreement, which stated that any dispute arising from his enrollment would be resolved by binding arbitration.

Young and seven other students filed a class action suit against GCU claiming that GCU misrepresented to students that they could finish a doctoral degree in 60 credit hours — but in reality, GCU designed its program so that finishing in 60 credit hours is unlikely, which then required students to take and pay for additional research continuation courses. Young and the other students asserted claims for breach of contract, intentional misrepresentation, unjust enrichment, and violations of the Arizona Consumer Fraud Act. The district court dismissed the claims brought by all plaintiffs, except Young, on personal jurisdiction grounds.

GCU then moved to compel arbitration pursuant to the agreement Young had signed as part of his admissions application. The district court granted GCU’s motion to compel, holding that Young’s breach of contract, misrepresentation, and statutory fraud claims were not “borrower defense claims” as defined by the federal regulation at issue and, therefore, were not subject to the regulation’s prohibition on pre-dispute arbitration agreements.

The regulation defines “borrower defense claim” as a “claim that is or could be asserted as a borrower defense as defined in § 685.222(a)(5), including a claim other than one based on § 685.222(c) or (d) that may be asserted under § 685.222(b) if reduced to judgment.” The main disagreement between the parties was whether the phrase “including a claim other than” means to include or exclude claims based on section 685.222(c) or (d) — i.e., claims alleging breach of contract and substantial misrepresentation. The district court interpreted the phrase to exclude breach of contract and substantial misrepresentation claims from the regulation’s definition of “borrower defense claim” and ordered Young’s claims to arbitration.

On appeal, the Eleventh Circuit disagreed, finding that the regulation’s definition of “borrower defense claim” includes breach of contract and substantial misrepresentation claims and therefore shields those claims from arbitration. The panel noted that the district court’s interpretation defies common sense, questioning: “Why would a regulation that all acknowledge was designed to protect student-loan borrowers exclude the most basic, heartland claims that they are likely to bring?” The panel also recognized that the district court’s strained interpretation would include non-contract and non-misrepresentation claims only if reduced to judgment, which would render the “if reduced to judgment” aspect of the borrower defense claim protection meaningless. As a result, the panel reversed the district court’s decision.

Young v. Grand Canyon University, Inc., No. 19-13639 (11th Cir. Nov. 16, 2020).

Fourth Circuit Declines to Vacate Arbitration Award Where Challenge to the Award Was Nothing More Than an Ordinary Disagreement With Its Outcome

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Tecnocap LLC appealed a decision by the U.S. District Court for the Northern District of West Virginia, where it declined to vacate an arbitration award in favor of an employee and labor union in a grievance proceeding related to Tecnocap’s termination of an employee covered by the parties’ collective bargaining agreement.

The parties’ collective bargaining agreement prohibited Tecnocap from “summarily discharging” covered employees and required that termination of employment be “for just cause.” The agreement also subjected grievances involving the interpretation of express provisions of the arbitration agreement. Separate from the agreement, Tecnocap instituted an attendance program wherein employees accrued points for certain absences from work and were then subject to different disciplinary procedures based on the number of accrued points.

After a Tecnocap employee accrued nine points in the attendance program and failed to timely submit paperwork that would allocate one of his absences to FMLA leave, Tecnocap terminated his employment. The union then filed a grievance protesting the employee’s termination, which proceeded through arbitration.

The arbitrator determined that the grievance was arbitrable, rejecting Tecnocap’s argument that the grievance was untimely and should be denied or dismissed on procedural grounds, pointing to the parties’ past conduct of inattentiveness to grievance deadlines as evidence of a waiver of such deadlines. The arbitrator also ruled that Tecnocap did not have “just cause” to terminate the employee because it improperly assessed him with a ninth point.

Tecnocap filed an action in the U.S. District Court for the Northern District of West Virginia under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, to vacate the arbitrator’s award, and the union filed an action under the same provision to enforce the arbitrator’s decision, which it alleged Tecnocap had refused to follow.

The district court found Tecnocap failed to present evidence that would warrant overturning the arbitrator’s award, including any evidence that the award: (i) was the product of the arbitrator’s bias; (ii) ignored the evidence in favor of the arbitrator’s own brand of “industrial justice”; or (iii) altered the language of the collective bargaining agreement.

Tecnocap then appealed, arguing that the district court should have concluded that the arbitrator’s award did not draw its essence from the collective bargaining agreement and therefore should have been vacated. Affirming the district court’s decision, the panel rejected Tecnocap’s challenge, finding that Tecnocap presented nothing more than an ordinary disagreement with the outcome of the arbitration award based on Tecnocap’s preferred application of the collective bargaining agreement to the underlying facts.

The panel determined that the collective bargaining agreement plainly delegated authority to the arbitrator to adjudicate grievances involving the interpretation or application of the express provisions of the agreement and that upon being delegated with that authority, the arbitrator had the authority to review whether Tecnocap fulfilled its obligations under the agreement and whether the termination comported with the agreement’s “just cause” limitation. The panel held that the arbitrator’s decision was a clear exercise in applying the agreement’s provisions and that Tecnocap failed to point to any limitation in the agreement that prevented the arbitrator from making her decision.

Tecnocap, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Industrial & Serv. Workers Int’l Union AFL-CIO/CLC, Local Union No. 152M, No. 19-1263 (4th Cir. Jan. 19, 2021).