Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Denies Petition to Vacate, Finding Petitioner Waived Objection Based on Arbitrator Impartiality

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Section 10(a)(2) of the Federal Arbitration Act allows a court to vacate an arbitration award based on “evident partiality” in the arbitrators. Citing section 10(a)(2), the petitioner moved to vacate a JAMS arbitration award issued in favor of the respondent, claiming the arbitrator failed to timely disclose the full extent of her financial interest in JAMS, and because JAMS itself belatedly disclosed the number of proceedings it had conducted involving the respondent’s law firm. The information was first disclosed after post-hearing briefing and roughly one week before closing arguments.

Failure to disclose apparent interests and/or conflicts is not, in and of itself, a basis for vacating an arbitration award in the Third Circuit. Rather, the court explained, non-disclosure is relevant only to the extent that the non-disclosure reveals evident partiality, defined as “proof so powerfully suggestive of bias that a reasonable person would have to believe that the arbitrator was partial to Respondent.” Using a four-factor balancing test adopted from the Second and Fourth Circuits, the court held that the failures to disclose in this case were “blatant and indefensible” and thus weighed in favor of a finding of bias. Nevertheless, the court denied the petitioner’s motion to vacate, finding her “glaring” failure to raise the issue until several months later, and only after an award was issued against her, constituted a waiver of any otherwise valid objection.

Martin v. NTT Data, Inc., No. 2:20-cv-00686 (E.D. Pa. June 23, 2020).

Texas Supreme Court Holds Defendant Did Not Forfeit Right to Appeal Denial of Motion to Compel Arbitration by Waiting Until After Entry of Jury Verdict in Plaintiff’s Favor

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In this cattle-feeding dispute, cattle owner Bonsmara Natural Beef Co. and its principal George Chapman brought an action against feed yard owner Hart of Texas Cattle Feeders LLC, alleging claims including breach of contract, negligence, and fraud. Chapman also sought a declaratory judgment discharging him from liability as a guarantor for the cattle finishing contract. The trial court denied Hart’s motion to compel arbitration and, after a jury trial, entered judgment in favor of Bonsmara and Chapman. Hart appealed, and the court of appeals reversed and remanded.

On petition for review, the Supreme Court of Texas, in a 6-3 decision, affirmed the court of appeals’ judgment overturning the trial court’s denial of Hart’s post-judgment motion to compel arbitration, holding that a party does not forfeit its right to challenge a ruling on an appeal from a final judgment simply by opting not to pursue an interlocutory appeal of that ruling.

The Supreme Court addressed two issues:

  1. Whether Hart’s failure to appeal the interlocutory order denying its motion to compel arbitration deprived the appellate court of jurisdiction to overturn that order on appeal from a final judgment; and
  2. If the order was appealable, whether the court of appeals erred in ordering arbitration.

As to the first issue, the majority found that the court of appeals had jurisdiction to consider the trial court’s denial of Hart’s motion to compel arbitration because interlocutory appeal statutes do not alter the principle that orders merge into – and may be challenged on appeal from – a final judgment. The majority relied on the legislature’s use of the permissive term “may” in the interlocutory appeal statute and the fact that the statute did not provide a noncompliance penalty or indicate consequences of not appealing the arbitration decision immediately to support its opinion. The majority noted that the decision to appeal a court’s denial of arbitration is one that must be weighed and decided by the parties and their counsel based on the case’s facts.

As to the second issue, the majority held that the court of appeals did not err in ordering arbitration, finding that the arbitration agreement was enforceable because Bonsmara had not shown that the arbitrator determined that the arbitral forum was unavailable and that the arbitration clause’s language did not foreclose the application of direct-benefits estoppel to require arbitration with non-signatories.

Accordingly, the majority affirmed the judgment of the court of appeals.

The dissenters felt that the majority’s decision ran counter to common sense and basic notions of fairness – that by allowing litigants to see the outcome of a trial before appealing a denial of a motion to compel arbitration, the majority endorses a dispute resolution process that will result in “double the cost and double the time.”

Bonsmara Natural Beef Co. v. Hart of Texas Cattle Feeders, LLC, No. 19-0263 (Tex. June 26, 2020).

Ninth Circuit Remands Order Denying Motion to Compel Arbitration That Failed to Address the Effect of Delegation Clause in Parties’ Arbitration Agreement

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The delegation clause in the parties’ arbitration agreement provided that any “questions regarding the validity or enforcement of these Dispute Policies shall be delegated and submitted to the arbitrator, including whether the scope of the claim or dispute is subject to arbitration, and whether these Dispute Policies are enforceable as a matter of law.” The district court, however, ignored the clause and considered the validity and enforceability of the arbitration agreement by analyzing the unconscionability of portions of the agreement other than the delegation clause. That, the Ninth Circuit explained, was error.

The Ninth Circuit explained that the plaintiffs in the proceedings before the district court did not challenge the enforceability or validity of the delegation clause. Instead, the plaintiffs had contended that the defendants abandoned any argument relying on the delegation clause because they did not adequately raise the issue. The Ninth Circuit, however, disagreed that the defendants abandoned it, noting that the defendants had relied on the delegation clause in their briefing in support of their motion to compel arbitration. The Ninth Circuit also rejected the plaintiffs’ argument that the district court had found that the defendants had waived the delegation clause, observing that the lower court had actually indicated that it was uncertain as to whether waiver had occurred.

The Ninth Circuit concluded that the plaintiffs failed to meet their burden of proving a defense to the enforceability of the delegation clause. However, the Ninth Circuit ruled, because the district court did not address the issue, it would vacate the order and remand the case to allow the district court to provide “a full analysis,” which the Ninth Circuit held might assist the court in its review.

Cipolla v. Team Enterprises, LLC, No. 19-15964 (9th Cir. June 24, 2020).

Determining Whether “Clickwrap Agreement” Provides “Reasonable Notice” of an Arbitration Agreement Is a Fact-Intensive Inquiry

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Timothy Hidalgo sued the Amateur Athletic Union of the United States Inc. (AAU) on behalf of a purported class for damages emanating from a data breach suffered by the AAU. The court granted the AAU’s motion to compel arbitration.

Hidalgo used the Safari web browser on his iPhone to access and complete the AAU membership application. Because the AAU application was “not compatible for smartphone use,” the plaintiff “had to move the screen back and forth for each line of text and zoom in and out because the full application was not visible on the iPhone screen at one time.” The application contained a “clickwrap agreement” that required Hidalgo to click an “I agree” box after being presented with a list of terms and conditions of use. The court noted that to be bound by an arbitration agreement contained within the clickwrap agreement, the web user must have “reasonable notice of the arbitration provision.” The parties disputed whether the web-based application provided sufficiently reasonable notice of the arbitration provision.

The court discussed several recent cases that examined the enforceability of arbitration provisions contained within clickwrap agreements and identified the following facts as relevant:

  • The font size, bolding, and capitalization of the relevant language;
  • The color of the hyperlink directing the user to the full agreement and whether it “stands out” from the other language;
  • Whether the language next to the checkbox sufficiently notifies the user that he or she is entering into an agreement (as opposed to merely completing a purchase or step, e.g., clicking “place your order” does not specifically manifest assent to additional terms);
  • The layout of the page, including whether the page is “cluttered”;
  • Whether the relevant language directing the user to the full agreement is conspicuously placed on the webpage;
  • The number of other links on the same webpage;
  • The number of different font types and sizes used on the same webpage;
  • Whether the page contains distracting elements, such as other “buttons” or “promotional advertisements”; and
  • Whether notice of the full agreement is provided contemporaneously with the user’s agreement (i.e., on the same page), or later in time (i.e., via a follow-up email).

In sum, the “inquiry whether a web user had ‘reasonable notice’ of contract terms contained in a contract accessible by hyperlink depends on the ‘totality of the circumstances.'” Here, the “AAU application screen clearly draws a reasonable user’s attention to it because of the blue hyperlinks, the red asterisks, the normal font size, and the clear contrast between the mostly black text and the yellow background.” In addition, the terms and conditions box was “prominently placed squarely in the middle of the very end of the application, which is a conspicuous part of the application because it is the last place an applicant looks before finishing the application process.” After discussing other characteristics of the webpage, the court found that the user had sufficient “reasonable notice” of the arbitration provision contained within the clickwrap agreement, and therefore the arbitration agreement was enforceable.

Hidalgo v. Amateur Athletic Union of the United States, Inc., No. 1:19-cv-10545 (S.D.N.Y. June 16, 2020).

Sixth Circuit Affirms Ruling That Arbitrator Is to Determine Arbitrability of Employment Dispute Between Franchise Employees and Domino’s

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The plaintiffs filed a class action against Domino’s, alleging that the company’s franchise agreement violated federal antitrust law as well as state law. Domino’s moved to compel arbitration, and the plaintiffs opposed on the basis that Domino’s couldn’t enforce the arbitration agreements because Domino’s hadn’t signed the agreements; only their franchises had. However, incorporation of the AAA rules in the plaintiffs’ agreements provided “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability.”

The plaintiff offered several arguments against such conclusion: (1) the arbitration agreement incorporates the AAA rules only as to claims that fall within the scope of the agreement; (2) the relevant AAA rule addresses only the “existence, scope, or validity” of his agreement, not whether non-signatories may enforce arbitration agreements under the FAA; (3) even if the relevant AAA rule gives arbitrators the power to decide the question of “arbitrability,” it does not give them the exclusive power to do so; (4) Sixth Circuit precedent has held, in certain instances, that incorporation of the AAA rules does not provide “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; (5) the incorporation of the AAA rules is not “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; and (6) a ruling for Domino’s would mean that anyone could force him to arbitrate “arbitrability” no matter how frivolous the argument for arbitration. The circuit court did not find these arguments availing and affirmed the Eastern District of Michigan’s ruling referring the matter to arbitration.

Blanton v. Domino’s Pizza Franchising LLC, No. 19-2388 (6th Cir. June 17, 2020).