Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Fifth Circuit Affirms Order Denying Motion to Compel Against Non-Signatories to Arbitration Agreement

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The Fifth Circuit Court of Appeals affirmed a district court order denying the plaintiff’s motion to compel arbitration against two non-signatories to the relevant contract. The plaintiff was issued a credit card by defendant Regions Bank. The credit card agreement contained an arbitration clause that the plaintiff relied on in seeking to compel arbitration of his claims against two of the three major credit bureaus, neither of which was a signatory to the credit card agreement. The district court denied the plaintiff’s motion and the Fifth Circuit affirmed. The court found that neither of the credit bureau defendants had claims against either of the parties to the arbitration agreement – the plaintiff and Regions Bank – and that the agreement did not contemplate the consolidation of third-party claims under present circumstances. Thus, applying Alabama law, the court held that the credit bureau defendants could not be compelled to arbitrate the plaintiff’s claims against them as they were neither expressly nor implicitly parties to the credit card agreement and were not otherwise third-party beneficiaries to it.

Patel v. Regions Bank, No. 19-30582 (5th Cir. Apr. 21, 2020).

Illinois Federal Court Finds Shutterfly User Must Arbitrate Illinois Biometric Privacy Claim Even Though Shutterfly Unilaterally Amended Its Arbitration Clause

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Plaintiffs Vernita Miracle-Pond and Samantha Paraf, each Shutterfly users with a Shutterfly account, sued defendant Shutterfly Inc., on behalf of themselves and similarly situated Shutterfly users, under the Illinois Biometric Information Privacy Act (BIPA) claiming that Shutterfly violated BIPA by using facial-recognition technology to extract biometric identifiers for “tagging” individuals and by “selling, leasing, trading, or otherwise profiting from Plaintiffs’ and Class Members’ biometric identifiers and/or biometric information.” Shutterfly moved to compel arbitration for Miracle-Pond and to stay the litigation pending the outcome of the arbitration.

The court first analyzed whether Miracle-Pond agreed to the terms of use in 2014. Miracle-Pond argued that she did not assent to Shutterfly’s terms of use when she formed her Shutterfly account because the terms of use are a “browsewrap” agreement, and thus she merely agreed that her use of Shutterfly’s website and services would comply with the terms of use, not that she would be bound by them. The court rejected that argument, finding that Shutterfly’s agreement was a valid “clickwrap agreement” as Shutterfly’s page presented the terms of use for viewing, stated that clicking “accept” would be considered acceptance of the terms of use, and provided both an “accept” and “decline” button. “Because Shutterfly’s ‘app contained a clear and conspicuous statement that … a user agreed to the Terms of Service and Privacy Policy’ by clicking a link or pressing a button,” the court found that a reasonable user who completes that process would understand that he or she was manifesting assent to the terms. Miracle-Pond, therefore, agreed to be bound by Shutterfly’s terms of use.

Notably, the terms of use accepted by Miracle-Pond in 2014 did not contain an explicit arbitration provision. Rather, Shutterfly added an arbitration provision to its terms of use in May 2015. Thus, Miracle-Pond argued that even if a contract was formed between the parties, there was no valid agreement to arbitrate because: (1) arbitration clauses subject to unilateral modification are illusory; (2) Miracle-Pond could not have assented to the arbitration provision because Shutterfly failed to provide notice of the 2015 modification; and (3) arbitration clauses that apply retroactively are unenforceable.

The court found that in 2014, Miracle-Pond entered into a service contract that explicitly gave Shutterfly the right to modify the agreement unilaterally at any time and without notice, other than posting the modified terms on its website. Shutterfly posted the modified terms of use on its website in May 2015, and Miracle-Pond indicated her acceptance to the modified terms of use by continuing to use Shutterfly products. The court rejected Miracle-Pond’s arguments regarding lack of notice and held that Miracle-Pond was bound by the 2015 modifications to the terms of use.

In September 2019, about three months after Miracle-Pond filed this lawsuit, Shutterfly sent an email to all of its users nationwide, which notified Shutterfly users that the terms of use had been updated. Miracle-Pond argued that the September 2019 email “was an improper ex parte communication with Plaintiff and putative class members because it failed to advise them of the pending litigation while seeking to deprive them of their rights as plaintiffs or class members” and that a new agreement to arbitrate could not apply retroactively to her claims. The court rejected her argument and found that she was bound by the 2015 modification and therefore agreed to arbitrate her claims in 2015 – well before she filed this lawsuit.

Lastly, Miracle-Pond argued that even if the arbitration clause was valid, plaintiffs cannot waive their right to class arbitration of their claim for an injunction under California’s McGill rule, which provides that plaintiffs cannot waive their right to public injunctive relief in any forum, including in arbitration. But the court found that the plaintiffs’ substantive claim arose under an Illinois statute – BIPA – not under the consumer protection laws of California, making the McGill rule inapplicable to the arbitration agreement in this case.

Accordingly, the court granted Shutterfly’s motion to compel arbitration for Miracle-Pond and stay the proceedings.

Miracle-Pond v. Shutterfly, Inc., No. 1:19-cv-04722 (N.D. Ill. May 15, 2020).

Third Circuit Affirms Denial of Motion to Compel Car Rental Class Action to Arbitration Based on Insufficiently Incorporated Arbitration Provisions

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Seven plaintiffs filed a putative class action against a car rental company and its subsidiary for allegedly unauthorized charges incurred when the plaintiffs rented cars from the company. The car rental companies moved to compel the plaintiffs to arbitrate their claims under the Federal Arbitration Act based on an arbitration clause that, for six out of the seven plaintiffs (the “U.S. plaintiffs”), was located on the paper jacket into which rental associates folded the car rental agreement, and for the seventh plaintiff (the “Costa Rica plaintiff”), was located on the back of the agreement.

Each U.S. plaintiff signed below the final paragraph on the agreement, which provided: “I agree the charges listed above are estimates and that I have reviewed & agreed to all notices & terms here and in the rental jacket.” The rental associates, however, were not trained to alert customers to the additional terms in the rental jacket, and the rental associates did not say anything about the rental jacket when the U.S. plaintiffs reviewed their agreements. Additionally, five U.S. plaintiffs used websites to reserve their car rentals, each of which had terms of use that included an arbitration provision. Regarding the agreement signed by the Costa Rica plaintiff, the front and back sides of the document both had signature lines, but the Costa Rica plaintiff signed only the front.

The district court denied the car rental companies’ motion to compel arbitration. The court found: (1) the U.S. plaintiffs did not assent to the arbitration provision in the rental jacket; (2) the record was not sufficiently developed with respect to the arbitration clause on the websites; and (3) a disputed factual issue existed as to whether the Costa Rica plaintiff was on reasonable notice of the arbitration provision.

On appeal, the Third Circuit found that it possessed jurisdiction over all three of the above issues under the FAA. The Third Circuit then determined that the rental car companies failed to demonstrate that the rental jacket containing the arbitration provision was incorporated into the U.S. agreements based on applicable state contract law. The agreement did not define or clearly describe the rental jacket, and there was no evidence that the plaintiffs were aware of the arbitration provision before they executed the agreement.

The court also rejected the defendants’ arguments that the plaintiffs who booked online agreed to each website’s terms of use and arbitration provision or that the district court erred in excluding unauthenticated evidence concerning the websites. Finally, the court affirmed the district court’s ruling that genuine issues of material fact existed as to whether the Costa Rica plaintiff had reasonable notice of the arbitration provision on the back of the car rental agreement. The court noted that the front side of the agreement did not direct the customer to the back of the agreement (containing the arbitration provision) or inform the customer of the terms. The Third Circuit therefore affirmed the district court’s refusal to compel arbitration.

Bacon v. Avis Budget Group, Inc., No. 18-3780 (3d Cir. May 18, 2020).

Split Decision in the Ninth Circuit: Two Non-Signatory Defendants Can Compel Arbitration Based on Equitable Estoppel, One Cannot

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All three defendants were non-signatories to the underlying contract containing the arbitration agreement they sought to enforce. They each contended that they were entitled to enforce the arbitration agreement, despite their non-signatory status, through equitable estoppel. “The right to compel arbitration is generally limited to parties to the contract, but non-signatories may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement.” California law, which applied to the contract at issue, permits non-signatories to assert equitable estoppel to seek arbitration where: (1) the signatory must rely on the written agreement, or the signatory’s claims are intertwined with the agreement; or (2) the signatory alleges concerted misconduct by the non-signatory and another signatory, and the misconduct is intimately connected with the obligations of the agreement.

With regard to the first defendant, the court determined that none of the plaintiffs’ claims relied upon, were founded in, or were intertwined with the terms of the contract containing the arbitration agreement. In addition, the plaintiffs’ claims did not allege collusion or a pattern of concealment involving that defendant and a signatory to the contract. Therefore, under California law, the first defendant could not invoke equitable estoppel to compel arbitration. However, with regard to the other two defendants, the court determined that although the plaintiffs’ complaint did not explicitly mention the contract, their allegations regarding the defendants were “exactly the terms and duties of the [contract].” As such, the plaintiffs’ claims were founded in and inextricably intertwined with the terms and obligations of the contract containing the arbitration agreement. Therefore, the second set of defendants could invoke equitable estoppel to compel the plaintiffs to arbitrate their claims.

In re Pacific Fertility Center Litigation, No. 19-15885 (9th Cir. May 15, 2020).

Fifth Circuit Rejects Challenges to $147M International Arbitration Award

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The Fifth Circuit has rejected challenges under Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to a Swedish arbitration award.

In 1994, Carpatsky Petroleum Corp., at the time a Texas company, entered into a joint activity agreement with Ukraine’s state oil and gas enterprise (OJSC Ukrnafta) to develop an oil and gas field in Ukraine.

Two years later, Carpatsky merged into a newly incorporated Delaware company also called Carpatsky. Carpatsky did not formally notify Ukrnafta of this corporate change, and an amendment to the joint activity agreement executed shortly thereafter stated that Carpatsky was registered in Texas and was affixed with a seal that included Carpatsky’s Texas incorporation number.

The oil and gas venture went south and led to litigation and arbitration. A Swedish arbitration tribunal ultimately awarded Carpatsky approximately $147 million. A federal district court subsequently confirmed that award. Ukrnafta appealed that ruling to the Fifth Circuit.

Ukrnafta first challenged the district court’s removal jurisdiction. The Fifth Circuit rejected that claim, noting that “[r]emoval is allowed whenever a defendant asserts a ‘nonfrivolous connection’ to an international arbitration agreement.” The court concluded that that “low bar” was “easily clear[ed]” by Carpatsky under the facts of this case.

The Fifth Circuit accordingly turned to Ukrnafta’s merits claims.

At the outset, the court noted that it only had “secondary jurisdiction” over the case because the arbitration award was rendered in Sweden under Swedish law. The court’s review was therefore limited to determining whether the award should be vacated under the grounds listed in Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Ukrnafta’s principal contention was that the relevant agreements between the parties were not valid because of Carpatsky’s allegedly undisclosed change in domicile from Texas to Delaware and the use of a seal with Carpatsky’s Texas incorporation information on an amendment after Carpatsky had reincorporated in Delaware through a merger. The Fifth Circuit rejected that claim. It explained that Carpatsky’s signatory (whose name was Mr. Texas) had the capacity to bind Carpatsky, and Mr. Texas’ use of the Texas seal to do so didn’t change that. Ukrnafta had also waived its claim that Carpatsky’s reincorporation somehow rendered the arbitration agreement void by submitting to the arbitration in Stockholm after it knew about the reincorporation. That agreement was effectively a new agreement to arbitrate the disputes between the parties.

The Fifth Circuit then rejected Ukrnafta’s remaining claims under Article V:

  • The arbitration awarded Ukrnafta ample due process (the tribunal “held multiple hearings,” the “parties submitted witness statements, expert reports, and multiple rounds of briefing,” and the “merits hearing lasted four days with fifteen witnesses,” similar to a “full-blown federal trial”) and Ukrnafta had therefore not been “unable to present [its] case.”
  • The arbitration award did not exceed the “terms of the submission to arbitration” and was not “beyond the scope of the submission to arbitration” merely because the panel refused to apply a limitation of liability because it concluded “that Ukrainian law renders a limitation of liability unenforceable in cases of international breach” and regardless of whether that decision was “[r]ight or wrong,” it was not a ground for nonrecognition.
  • For the reasons already discussed regarding Ukrnafta’s agreement to arbitrate in Sweden, “Ukrnafta waived [any] challenge to the Stockholm tribunal’s jurisdiction.”
  • The arbitration award was not “contrary to the public policy” on the ground that it disrespected the holding of Ukrainian courts in related litigation that “the 1998 amendment” to the joint activity agreement “was invalid because of Carpatsky’s changed domicile”: although American courts are concerned with comity, there is a “strong policy favoring international arbitration” and “[e]nforcing this award would [therefore] further American policy, not contravene it.”

The Fifth Circuit also rejected Ukrnafta’s argument that the arbitration panel had “‘manifestly disregarded’ the Ukrainian statute of limitations” (that was not a ground for refusing to enforce the award under Article V) and Ukrnafta’s attempt to pursue state law claims (those claims were barred by the doctrine of claim preclusion based on the arbitration proceedings).

The Fifth Circuit, therefore, affirmed the district court’s confirmation.

OJSC Ukrnafta v. Carpatsky Petroleum Corp., No. 19-20011 (5th Cir. Apr. 6, 2020).