Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Ninth Circuit Affirms Denial of Motion to Compel Arbitration in Smartphone App Case Based on Obscure “Browsewrap” Arbitration Clause

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The Ninth Circuit recently denied a motion to compel arbitration after concluding that an arbitration agreement “buried” in difficult to access terms for a smartphone app did not put users on constructive notice that they were agreeing to arbitration (and a class action waiver).

Huuuge Inc. operated a smartphone application that allowed users to play casino games. Sean Wilson downloaded and played that app for more than a year. Wilson then filed a putative class action alleging that Huuuge violated the state of Washington’s gambling and consumer protection laws by charging users for chips to play the casino games.

Huuuge moved to compel arbitration. It relied on an arbitration agreement and class action waiver in the terms and conditions for the app. The U.S. District Court for the Western District of Washington denied Huuuge’s motion to compel arbitration.

The Ninth Circuit affirmed on appeal. The court explained that a “user would need Sherlock Holmes’s instincts to discover the [t]erms” containing the arbitration agreement. A user could access the terms in two ways. First, before downloading the app, the user could click on a “more” button in the app store, which took the user to a page that discussed the app. The user would then need to scroll down and see a paragraph that began with: “Read our Terms of Use.” Although a “link” was in that paragraph, the user could not click on it. Instead, the user had to copy and paste it into a web browser to access the terms. Second, after downloading the app, the user could click a “three dot ‘kebob’ menu button in the upper right-hand corner of the home page,” which took them to a pop-up menu. The fifth option down on that menu read: “Terms & Policy.” Clicking on that option opened the terms, including the arbitration agreement.

Users were not required to view or assent to the terms and conditions. Thus, the agreement was a classic “browsewrap” agreement, which does “not require the user to take any affirmative action to assent to the website terms.” (In contrast, a “clickwrap” agreement “require[s] users to affirmatively assent to the terms of use before they can access the website and its services.”)

Applying traditional contract law of the state of Washington, the Ninth Circuit concluded that the manner in which Huuuge displayed the arbitration agreement and class action waiver did not put Wilson on constructive notice that he was agreeing to arbitration and a class action waiver. It explained: “Users are put on constructive notice based on the conspicuousness and placement of the terms and conditions, as well as the content and overall design of the app.” Constructive notice did not exist where terms are “buried” or “in obscure corners,” particularly where scrolling to such areas was not required to use the app. Indeed, the Ninth Circuit noted that “[e]ven where the terms are accessible via a conspicuous hyperlink in close proximity to a button necessary to the function of the website, courts have declined to enforce such agreements.”

Huuuge’s terms were not anywhere close to meeting the constructive notice standard.

The court also rejected Huuuge’s claim that Wilson was on actual notice of the arbitration agreement merely because he was “likely” to have viewed the terms at some point because he played the game so much. The court also concluded that Huuuge had waived its request for discovery regarding actual knowledge, noting that Huuuge chose not to pursue such discovery at the outset, instead moved to compel arbitration, and only then sought discovery (and did so insufficiently in a footnote in its reply brief) after moving to compel arbitration.

Wilson v. Huuuge, Inc., No. 18-36017 (9th Cir. Dec. 20, 2019).

Second Circuit Affirms District Court’s Order as It Addressed Party’s Argument on Appeal

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This case arises out of an underlying arbitration between First Capital Real Estate Investments LLC and SDDCO Brokerage Advisors LLC. First Capital appealed from an order of the district court denying First Capital’s petition to vacate an arbitration award, granting SDDCO’s petition to confirm the award, and granting SDDCO attorneys’ fees and prejudgment interest.

First Capital argued that the district court’s opinion and order failed to address First Capital’s argument that the award should be vacated because one of the arbitrators was not selected properly. The U.S. Court of Appeals for the Second Circuit affirmed the order of the district court. The Second Circuit explained that the district court did address First Capital’s argument in that it specifically stated in its opinion that “it had ‘considered all of the arguments raised by the parties’ and that as to any arguments ‘not specifically addressed, the arguments are either moot or without merit.'” Additionally, the Second Circuit reasoned that the district court opinion explained that “First Capital waived its objection to the arbitrator in question by failing to seek disqualification before the arbitration began.”

The Second Circuit also raised the issue of whether this was properly brought on appeal and noted that “if First Capital genuinely believed that the District Court overlooked one of its arguments, it did not attempt to bring the matter to the District Court’s attention through a motion for reconsideration.”

Accordingly, the Second Circuit held that the district court did not improperly fail to address First Capital’s argument and affirmed the award.

First Capital Real Estate Invs., LLC v. SDDCO Brokerage Advisors, LLC, No. 19-670 (2d Cir. Dec. 19, 2019).

Federal Court Dismisses Policyholder’s Third-Party Action Against Reinsurers

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A Puerto Rico district court dismissed a third-party action by defendant-policyholder Puma Energy Caribe LLC against the reinsurers of an insurance policy issued by plaintiff Integrand Assurance Co. Puma claimed that the reinsurers breached the reinsurance agreements with Integrand, prejudiced Puma’s rights as a third-party beneficiary of those agreements, and negligently handled reinsurance claims that Integrand submitted in connection with a claim Puma had made under the Integrand policy. The reinsurers sought dismissal based on lack of privity, lack of standing, arbitration clauses in the reinsurance treaties with Integrand, and on the ground that Puma improperly sought to implead them under Federal Rule of Civil Procedure 14(a), which allows a party to implead a nonparty “who is or may be liable to it for all or part of the claim against it.”

While recognizing the reinsurers’ arguments were “powerful,” the court dismissed Puma’s third-party claims on procedural grounds. Because Puma was not seeking “indemnity” from the reinsurers, the court found that Rule 14(a) was not the proper vehicle for obtaining the relief Puma had requested. The court also considered other procedural mechanisms, including Federal Rules of Civil Procedure 13(h), 19, and 20, but found each was inappropriate here as well. The court declined to award the reinsurers’ attorneys’ fees, although it agreed that Puma’s filings “come close to obstinance or frivolity.”

Integrand Assurance Co. v. Puma Energy Caribe, LLC, No. 3:19-cv-01195 (D.P.R. Dec. 27, 2019).

Court Denies Petition to Vacate Arbitration Award Based on Judicial Estoppel

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This case arises out of plaintiff John B. Napoleone’s failure to repay a sign-on bonus of $100,000 to his former employer, defendant S2K Financial LLC, under the terms of his employment agreement. S2K commenced an arbitration to recover the sign-on bonus by filing a statement of claim with FINRA. FINRA informed the parties that the case would be decided by a single arbitrator, unless all parties agreed in writing to three arbitrators, pursuant to FINRA’s Code of Arbitration Procedure for Industry Disputes. S2K filed a motion to expand the panel to three arbitrators, to which Napoleone opposed, arguing that S2K participated in selecting the single arbitrator and, therefore, waived its right to amend the number of arbitrators. In two instances thereafter, Napoleone advanced his position that the arbitration panel should not be expanded. The sole arbitrator issued an award finding that Napoleone was liable for breach of contract and granted S2K $100,000 in compensatory damages plus interest.

Thereafter, Napoleone filed a petition to vacate the arbitration award arguing that the arbitrator exceeded his power and acted in manifest disregard for the law by rendering an award without amending the panel to three arbitrators. S2K moved to confirm the arbitration award arguing that Napoleone was judicially estopped from asserting this basis for vacatur.

The court denied Napoleone’s petition to vacate the arbitration award and granted S2K’s petition to affirm the arbitration award. The court explained that “judicial estoppel protects the sanctity of the oath and integrity of the judicial process by preventing a party from asserting a factual position in a legal proceeding that is contrary to a position previously taken by that party in a prior legal proceeding.” A party invoking judicial estoppel must show that: “(1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that position was adopted by the first tribunal in some manner, such as by rendering a favorable judgment.” The court reasoned that Napoleone opposed a three-member arbitration panel in three separate instances in the underlying arbitration. This inconsistent position was adopted by the arbitrator twice. As such, the court ruled that Napoleone was judicially estopped from asserting this basis for vacatur, and denied his petition to vacate the arbitration award.

Napoleone v. S2K Financial, LLC, No. 1:18-cv-03124 (S.D.N.Y. Dec. 6, 2019).

Third Circuit Affirms Order Declining to Consolidate Reinsurance Dispute, but Vacates Order Denying Motion to Unseal

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Everest Reinsurance Co. appealed from two district court orders. It claimed that this dispute with Pennsylvania National Mutual Casualty Insurance Co. was the same as a prior dispute that Penn National had arbitrated with two other reinsurers. It, therefore, sought to have this matter consolidated with and heard by the same panel as the prior dispute. The parties agreed that whether this dispute and the prior dispute were actually the same was to be decided by the arbitrators, not the court. The issue was which arbitrators: a new panel, or the panel that heard the prior dispute. The district court ordered that the question goes to a new panel, and the Third Circuit agreed, citing language in the Everest/Penn National arbitration agreement stating that consolidation is only permitted “[i]f more than one reinsurer is involved in the same dispute.” By sending the present dispute to the same panel as the prior dispute at this juncture, the Third Circuit held, Everest was essentially asking the court to prejudge the question of whether the two disputes were “the same,” and thus disregard the express language of the agreement.

Everest separately appealed an order denying its motion to unseal records from the prior dispute. The Third Circuit agreed with Everest that the district did not apply the “more rigorous common law right of access” standard. It therefore vacated and remanded for the district court to apply the legal standard articulated by the Third Circuit in Avandia Marketing.

Pa. Nat’l Mut. Cas. Ins. Co. v. New England Reinsurance Corp., No. 19-1805 (3d Cir. Dec. 6, 2019).