Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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)

Former Employees Not Bound by Their Former Union’s Arbitration Agreement

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The former employees of a waste management company sued their former employer for violations of various federal and state labor laws. The company sought to compel arbitration and dismiss the complaint, relying on an arbitration agreement into which the former employees’ union had entered with the company more than 10 months after the former employees had left the company and commenced litigation. The court found that the determination regarding whether the employees were parties to the agreement was a “threshold inquiry [and] is the type usually decided by a court unless the parties have ‘clearly and unmistakably’ agreed to arbitrate that issue.” Finding no clear agreement to consign such threshold inquiries to the arbitrator, the court went on to hold that the arbitration agreement applied only to “present and future employees,” not past employees, and therefore did not bind the plaintiffs. The court distinguished Raymond v. Mid-Bronx Haulage Corp., No. 1:15-cv-05803 (S.D.N.Y. Nov. 2, 2017), in which the court held that a union contract may require past employees to submit their claims to arbitration. Raymond‘s holding was conditioned on the employee still being a member of the union. In addition, the arbitration agreement in Raymond explicitly applied to “past employees.” Here, no such explicit language was included in the arbitration agreement, nor were the past employees still members of the union. As such, they were not parties to, and therefore not bound by, the agreement to arbitrate. The court therefore denied the motion to compel arbitration.

Orlando v. Liberty Ashes, Inc., No. 1:15-cv-09434 (S.D.N.Y. Jan. 15, 2020).

Court Compels Arbitration of Balance Billing Dispute Under a California Health Plan, Severs Certain Unconscionable Provisions, and Rejects Class Arbitration Proceedings

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A patient sued her health plan and the plan’s debt collector under various California and federal laws in connection with alleged attempts by the plan to unlawfully collect the balances of the plaintiff’s medical statements that were in excess of the insurance allowed amounts. The defendants moved to compel arbitration based on arbitration agreements that the plaintiff executed when she enrolled in the health plan from year to year beginning in 2012. The plaintiff, however, opposed arbitration, arguing that (1) the arbitration agreements did not comply with section 1363.1 of the California Health and Safety Code, which requires that an arbitration provision be “prominently displayed” and meet certain other conditions, and (2) the agreements were unconscionable.

The court rejected the plaintiff’s arguments. With respect to section 1363.1, the court found that it was preempted by the Affordable Care Act for the time period in which that law was applicable and that the plan’s arbitration disclosures complied with the law. And as to unconscionability, the court found that the agreements’ attorney fees and cost-splitting provisions were unconscionable, but these provisions could be severed from the arbitration agreements and would not preclude arbitration.

The plaintiff also argued that, if the court were to compel arbitration, it should be on a class basis because the arbitration agreements included references to “parties” asserting a claim (in plural form). The court, however, was not convinced. Relying on the U.S. Supreme Court’s Stolt-Nielsen decision and Ninth Circuit authority, the court held that even an ambiguous arbitration agreement did “not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to” resolve their dispute in a class proceeding. The court therefore compelled individual arbitration.

Hunter v. Kaiser Foundation Health Plan, No. 3:19-cv-01053 (N.D. Cal. Jan. 17, 2020).

First Circuit Refuses to Vacate Arbitration Award Following Stock Dispute

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The First Circuit recently denied a corporation’s numerous arguments seeking to vacate an arbitration award in favor of the individual who sold an entity to the corporation. The court’s decision reflected the narrow review of arbitration awards and the uphill battle that litigants face when trying to vacate such awards, even when arbitrators allegedly misinterpret contracts.

IBC Advanced Alloys Corp. purchased Beralcast from Gerald Hoolahan and Gary Mattheson in exchange for cash and IBC stock. When Hoolahan later tried to sell his stock, his brokerage firm told him it had been “unsuccessful in obtaining approval [for the sale] from the issuer.” Hoolahan’s attorney called IBC and was told that IBC had blocked the sale of Hoolahan’s shares because Hoolahan allegedly failed to disclose a claim against a sister company to one of Beralcast’s predecessor companies. Even worse, Hoolahan later learned that IBC had allowed Mattheson to sell his shares. Hoolahan initiated arbitration pursuant to the sale agreement.

The arbitrator ruled in Hoolahan’s favor, concluding that IBC had denied Hoolahan the benefit of the agreement and deliberately breached it. After concluding that IBC acted in bad faith, the arbitrator awarded Hoolahan his costs and fees. Hoolahan moved to confirm the award, while IBC moved to vacate or modify it. The district court confirmed the award and IBC appealed.

The First Circuit affirmed. Noting that review of arbitration awards is exceptionally narrow, the court first rejected IBC’s argument that the award was procured by undue means because it was based on testimony by Hoolahan’s attorney regarding his call to IBC, which IBC claimed violated ethical rules regarding contacting a party represented by counsel. The court explained that the arbitrator concluded that Hoolahan’s attorney’s call did not violate ethical rules because the attorney had credibly testified that he did not know IBC was represented by counsel until the end of the call and noted that the arbitrator’s determination of “ill-will” between IBC and Hoolahan was based on more than the call by Hoolahan’s attorney in any event.

IBC next claimed that the arbitrator acted improperly by not postponing the arbitration hearing when the IBC employee who spoke to Hoolahan’s attorney could not be present and by refusing to accept an affidavit from the employee. The First Circuit rejected that claim as well. The court noted that IBC never asked for a postponement and did not raise that argument before the district court. Nevertheless, applying plain error review to the argument, the court rejected this argument as “border[ing] on the absurd.” The arbitrator did not act improperly by not granting a continuance sua sponte or by allowing an affidavit in lieu of live testimony.

The First Circuit also rejected IBC’s argument that the arbitrator had exceeded his powers by awarding Hoolahan his costs and fees. Under Delaware law, which governed the agreement, costs and fees were appropriate where, as here, the arbitrator made a finding of “bad faith.”

IBC also claimed that the arbitrator misinterpreted the agreement because the agreement noted that IBC disclaimed any obligation to help Hoolahan sell his shares. The court rejected that argument, noting the very narrow scope of its review: “Even if IBC is right that the arbitrator did not correctly interpret the Agreement, he nonetheless interpreted it. And that is enough.”

Finally, the First Circuit also rejected IBC’s arguments regarding the arbitrator’s calculation of damages, concluding that IBC had not shown “manifest disregard of the law.”

The First Circuit awarded costs to Hoolahan.

Hoolahan v. IBC Advanced Alloys Corp., No. 19-1444 (1st Cir. Jan. 17, 2020).

Fifth Circuit Affirms Arbitration Award and Finds Panel Was Fairly Constituted and Did Not Award Punitive Damages

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In addition to awarding monetary damages against the defendants, the arbitration panel ordered that the defendants be divested of their shares in the plaintiff corporation. The defendants sought to vacate the award, arguing that the panel was improperly constituted and the award included speculative or punitive damages, rendering it unenforceable (among other reasons). The trial court’s judgment confirming the arbitration award was affirmed.

As to the argument that the panel was improperly constituted, the plaintiffs appointed five arbitrators and the defendants appointed two. The defendants argued that the method of selection was against the terms of the contract, which required an equal number of appointed arbitrators per side. While the court agreed that if the selection of the arbitration panel fundamentally departed from the contract’s selection process, the award should be vacated. However, the court found that there was no such departure here, as the contract’s selection process contemplated the number of parties, not the number of sides. Here there were seven parties and seven arbitrators.

As to the argument that the award included speculative or punitive damages, the court found that, while the panel did not have the authority to issue punitive damages per the parties’ agreement, it did possess powers to grant court-enforceable injunctive relief. Divesting the defendants of their shares in the plaintiff corporation “operates to achieve what the panel considered a fair result” to compensate the parties financially and achieve a just outcome, which “is precisely a matter of equity” and therefore distinguishable from punitive damages.

Soaring Wind Energy, LLC v. Catic USA Inc., No. 18-11192 (5th Cir. Jan. 7, 2020).