Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Declines to Compel Arbitration Based on Third-Party Agreement

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The U.S. District Court for the Southern District of Florida recently refused to compel arbitration in a putative class action based on an arbitration clause a plaintiff agreed to on a third party’s website he used to book a rental car from the defendant.

Ancizar Marin used Orbitz to book a rental car from rental car company Sixt. During that process, he agreed to Orbitz’s terms of use. Those terms included an arbitration clause that provided: “You and Orbitz agree that any and all Claims will be resolved by binding arbitration, rather than in court.” Marin subsequently picked up and returned his rental car from Sixt. After he returned his car, he received an email claiming that the car had been damaged. Marin filed a putative class action against Sixt claiming violations of Florida’s Deceptive and Unfair Trade Practices Act and Consumer Collection Practices Act. Sixt sought to compel arbitration.

The district court denied Sixt’s motion.

The court explained that Sixt was not a party to the arbitration clause between Orbitz and Marin. The clause said: “You and Orbitz agree …” Nor was Sixt a third-party beneficiary to that agreement. Although Sixt argued that it was a “supplier” under Orbitz’s terms of use and that this rendered it a beneficiary, the court concluded that Sixt was included in a different category of companies that worked with Orbitz (travel services), and that category was not mentioned in the arbitration clause. Therefore, Sixt could not invoke the arbitration clause.

Even if Sixt could invoke the arbitration clause, the clause did not cover the dispute between Marin and Sixt. Rather, it “cover[ed] disputes between Orbitz’s customers and Orbitz.” Marin’s dispute concerned alleged misconduct by Sixt unrelated to Orbitz.

Calderon v. Sixt Rent A Car, LLC, No. 0:19-cv-62408 (S.D. Fla. Feb. 12, 2020).

Third Circuit Affirms Confirmation of Arbitration Award Despite Challenge That Damages Figure Was Completely Irrational

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In a challenge to an arbitration award on the basis that the arbitrators exceeded their powers in determining damages, the Third Circuit affirmed the District of New Jersey’s confirmation of the award.

First, the appellant argued that the arbitrator erred by using sales data instead of supply data in arriving at a damages figure. The court stated that this “is precisely the type of decision we have no authority to second-guess under the Federal Arbitration Act. … All that matters is that the arbitrator’s decision had some basis in the record.”

Second, the appellant argued that the arbitrator manifestly disregarded the law in ordering quarterly royalty payments be made to the appellee, since the appellant cannot be made to pay royalties until its claims regarding patent invalidity and unenforceability have been adjudicated. The court noted that the “arbitrator clearly grappled with the import of the Lear decision” and found the appellee’s arguments to be more persuasive. “That good faith effort is more than enough to demonstrate that he did not manifestly disregard Lear.”

PNY Technologies, Inc. v. NETAC Technology Co., No. 19-1635 (3d Cir. Feb. 10, 2020).

Southern District of Texas Compels Arbitration Over Insured’s Claim that Arbitration Clause was Unconscionable

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The U.S. District Court for the Southern District of Texas recently compelled arbitration despite an insured’s claim that the operative arbitration clause was unconscionable because it required the arbitration panel to comprise “persons employed or engaged in a senior position in Insurance underwriting or claims.” In a rare decision, the court also compelled arbitration with respect to brokers who created the proposal for the policy at issue even though they were not parties to the arbitration clause because the plaintiff’s claim against the brokers was inherently intertwined with and relied on the policy that was subject to the arbitration agreement.

Four commercial buildings owned by the Bhandara Family Living Trust were damaged during Hurricane Harvey. The buildings were insured by a policy that allocated premiums and liabilities among a number of insurers, including Certain Underwriters at Lloyd’s. The trust made a claim under the policy. When the claim was denied, the trust filed suit against the insurers and brokers who prepared the proposal for the policy in Texas state court. The trust claimed that the insurers had breached the policy, acted in bad faith, and violated the Texas Insurance Code and that the brokers had violated the code by failing to disclose an allegedly unconscionable arbitration clause in the policy. The insurers invoked the arbitration clause, but the trust refused to arbitrate and asserted the clause was unconscionable. The insurers removed the case to federal court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The district court compelled arbitration with respect to the trust’s claims against both the insurers and brokers.

The trust claimed that the arbitration clause was unconscionable and therefore null and void because it provided that “the Arbitration Tribunal shall consist of persons employed or engaged in a senior position in Insurance underwriting or claims.” The trust argued that the clause “guarantee[d] a biased decisionmaker” and that the clause’s invocation of New York law precluded damages permitted by Texas law. The court rejected that argument. It distinguished cases in which the arbitrators had to be selected from a list pre-selected by one side and noted that, in this case, the trust was free to select an arbitrator. The arbitrator would not be inherently biased merely because they were engaged in a senior position in underwriting or claims: The trust was “not limited to employees of insurance companies.” It “could select a broker or agent in a senior position in a business that represents insureds in making claims,” for example.

The trust’s challenge to New York law and the limits that the choice-of-law provision imposed on damages was “collateral to and [did] not call into question the parties’ agreement” to arbitrate. Regardless, the trust was free to make its arguments on that front to the arbitrator.

With respect to the claims against the brokers, the court noted that nonsignatories are rarely allowed to invoke an arbitration clause. However, one situation in which it is appropriate to allow a nonsignatory to do so is when “the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory.” In this case, the trust’s claims against the insurers and brokers were “substantially intertwined.” Indeed, the core claim against the brokers concerned the allegedly unconscionable arbitration clause itself. “Because [the trust’s] claim against the Broker Defendants relie[d] on and presumes the existence of the terms of the Policy, arbitration [was] required” as to that claim.

Bhandara Family Living Trust v. Underwriters at Lloyd’s, London et al., No. 4:19-cv-00968 (S.D. Tx. February 20, 2020).

Kentucky District Court Confirms Arbitration Award Allocating All Environmental Contamination Costs to Petitioner

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Following a 2007 settlement concerning the allocation of investigation and remediation costs incurred due to environmental contamination at an industrial complex, the parties agreed to resolve the litigation between the parties and arbitrate the allocation of certain environmental costs. The parties engaged in arbitration from May 2017 to May 2019. The panel issued a final unanimous award assigning 100% of the allocable costs to the plaintiff. The plaintiff sought to vacate the award on the basis that: (1) the arbitrators exceeded their powers by imposing the burden of proof on the plaintiff in violation of the 2007 settlement agreement; (2) the arbitrators manifestly disregarded the legal principle that rejects incremental cost allocation; and (3) the award violated public policy requiring polluters to pay for the environmental harm they cause. The court disagreed with the plaintiff’s arguments and confirmed the award.

As to the plaintiff’s first argument concerning the burden of proof, the court concluded that the settlement agreement was silent as to which party should bear the burden of proof at arbitration. Additionally, the section cited by the plaintiff merely established the procedure by which the parties may initiate arbitration and required “the initiating party to state the amount of Allocable Costs it contends should be assigned to each party, including a brief statement in support of that allocation, presumably to notify the other party what issues will be arbitrated.”

As to the plaintiff’s second argument as to incremental cost allocation, the court found that the panel did not disregard any legal principal but simply found that the plaintiff failed to prove that the defendant “had actually contributed in any material way to the contamination at the Site, or that [the defendant’s] activities were the cause of any of the costs at issue.”

As to the plaintiff’s third argument regarding public policy, the panel found that the “evidence did not establish the amount of contamination caused by [the defendant’s] alleged poor remediation, or the fact or amount of any cost for remediation of any such contamination” for which the defendant would be financially responsible. Thus, 100% of the allocable costs were assigned to the plaintiff, which was not in violation of any public policy.

PolyOne Corp. v. Westlake Vinyls, Inc., No. 5:19-cv-00121 (W.D. Ky. Feb. 11, 2020).

Ninth Circuit Affirms District Court’s Order Denying Motion to Compel Arbitration in Putative Class Action Where Defendant Failed To Prove Plaintiffs Assented to Arbitration Clause

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The Ninth Circuit affirmed the district court’s order denying Double Down Interactive, LLC, and International Game Technology’s (collectively, “Double Down”) motion to compel arbitration in a putative class action filed by Mary Simonson and Adrienne Benson, finding that Double Down failed to carry its burden to prove, under Washington law, that either plaintiff assented to the arbitration clause in Double Down’s terms of use.

Noting “in the absence of actual notice, a browsewrap agreement like the Terms of Use at issue here, is enforceable only if a reasonably prudent user would have constructive notice of those terms,” the Ninth Circuit found that neither Simonson nor Benson received actual notice or constructive notice of Double Down’s terms of use.

The court reasoned “a user would have to closely scrutinize Double Down’s page on the Apple App Store in order to find the Terms of Use during the downloading process. There is no reference to them on the opening screen of Double Down’s page, but rather they are buried at the bottom of the page and accessibly only after scrolling past multiple screens and images that a user need not view to download the platform.” Similarly, the court stated the terms of use during gameplay on Double Down’s mobile platform is just as much of a “hide-the-ball exercise” where a user must first locate a small settings menu in a corner of the screen that is obscured amongst the brightly colored casino games, and then fine the terms of use heading in the pop-up settings menu, which is not bolded, highlighted, or otherwise set apart from the four other headings in that menu.

The court also found that plaintiffs did not receive constructive notice of the terms of use when first connecting to the Facebook platform as “the terms of use are accessible through a gray ‘App Terms’ hyperlink on a pop-up screen that is below and smaller than all other text on the screen” and “does not inform users that they are bound by the terms of use.” Nor do the terms of use hyperlink and accompanying notification that are accessible during gameplay on the Facebook platform cure the notice problem, as the hyperlink and notification become visible only after the user scrolls to the bottom of the platform, and are obscured amongst the brightly colored icons on the Facebook platform, and are set out in typeface that is substantially smaller than all other text on the screen.

The court also rejected Double Down’s other arguments, as repeated use of a website or mobile application does not contribute to constructive notice, nor do the terms and conditions that govern all transactions on the Apple App Store place a reasonably prudent user of the mobile platform on constructive notice of Double Down’s terms of use.

Accordingly, the district court’s order denying Double Down’s motion to compel arbitration was affirmed.

Benson v. Double Down Interactive, LLC, No. 18-36015 (9th Cir. Jan. 29, 2020)