Today’s post covers three new developments from this past week. The Fifth Circuit found a defendant waived its right to arbitrate a class action; the Second Circuit found arbitrators retain power to clarify ambiguous awards; and Jay-Z found his list of potential arbitrators sorely lacking in diversity.

In Forby v. One Technologies, 2018 WL 6191349 (5th Cir. Nov. 28, 2018), a class of plaintiffs filed an action for consumer fraud. The defendant waited two years before compelling arbitration. In the meantime, it removed the case to federal court, transferred venue, and filed a Rule 12 motion to dismiss, which was only partially successful.

In response to the motion to compel, the plaintiffs argued the defendant had waived its right to arbitrate. The district court disagreed, finding that “delay alone is insufficient” to establish the prejudice required to prove waiver. On appeal, however, the Fifth Circuit found prejudice because the plaintiff would “have to re-litigate in the arbitration forum an issue already decided by the district court in its favor”, i.e. the Rule 12 issue. Even if defendant did not make another motion to dismiss in arbitration, the court disapproved of the tactic of “check[ing] the district court’s temperature” on the dispositive issue, before moving the case to another forum.

In General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 2018 WL 6186078 (Nov. 28, 2018), the Second Circuit examined whether a panel of arbitrators can clarify their own award. In the underlying reinsurance arbitration, the arbitrators had ordered the parties to unwind their agreement, and work together to figure out how much money had to be repaid. In the award, the arbitrators retained jurisdiction to resolve any dispute over the payments. The parties did not agree on the amount of repayment, or even how to calculate it. So, more than three months after the final award, one party wrote the arbitrators, seeking resolution of the payment dispute. The other side objected, characterizing the request as one to reconsider the final award. The panel clarified its award, after finding the award had ambiguities.

The Second Circuit confirmed the clarified award. Although usually an arbitration panel loses authority after issuing the final award, five circuits have recognized an exception to that “functus officio” doctrine where the final award is “susceptible to more than one interpretation”. The Second Circuit adopted the same exception, but limited it to when three conditions are present: the award is ambiguous; the clarification only clarifies the award, and does not substantively modify the award; and the clarification comports with the parties’ arbitration agreement.

Finally, making headlines across the country, Jay-Z has asked a New York state court to stay his arbitration, due to a lack of available African-American arbitrators. I will let you know when I hear of a decision. But, the underlying premise is one I have wondered about – are large arbitration providers a place of “public accommodation”? In the meantime, maybe Jay-Z will write a rap about arbitration… then it could be my theme song!

In an opinion that coins new terms and uses the insouciant tone of a blogger, the 11th Circuit just shut down a putative class action brought by homeowners against a vendor of roof shingles.  The Court found that the terms and conditions printed on the exterior of the shingle packaging formed an enforceable contract (with a class arbitration waiver), and when the roofing contractors opened the shingles, the roofers bound the homeowners who had hired them.  Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. Nov. 2, 2018).

The Dye decision relies heavily on two decades of case law finding that consumers are bound to terms and conditions that accompany software or consumer products or phone apps.  Indeed, the Court suggests that consumers have been on notice that they are bound by terms on the outside of packaging, or with a product, since the 1997 decision in Hill v Gateway 2000, 105 F.3d 1147 (7th Cir. 1997).  Those types of terms are called “shrinkwrap” or “clickwrap” or “scrollwrap” agreements.  And the Court found no reason to treat this agreement, which it termed a “shinglewrap” agreement, any differently.  Therefore, the Court found that by printing its arbitration clause, with a class action waiver, on the exterior of the shingle packaging, the defendant had formed an enforceable contract.

The harder part of the opinion, in my view, is with whom did the defendant form an enforceable contract.  It was not the homeowners who opened the shingle packaging, it was their roofers.  And there are no facts suggesting that the roofers informed the homeowners of the terms on the packaging, or that there were terms at all.  But the Court found that because the roofers were the homeowners’ agents for the purpose of purchasing and installing roof shingles, and because accepting the purchase terms is the kind of thing that should have been expected of the agents, the roofers bound the homeowners to the arbitration agreement (along with the rest of the terms).

[I am aware of at least one court that came out on the opposite side of this “shinglewrap” issue.  In 2015, the Missouri Court of Appeals refused to enforce the same vendor’s arbitration agreement, finding the circumstances distinguishable from cases like Hill v. Gateway.]

Although the Court makes short work of the agency portion of this opinion, I think it merits a deeper analysis.  Usually, even in the case of contracts of adhesion, courts note that the party had some semblance of choice: either to not buy the product, or not work for that employer, etc.  Here, it is hard to see how the homeowners had a choice, since they were unaware that their roofers were considering shingles that would preclude class actions.  Should owners (commercial and residential) put clauses in all their construction contracts revoking the right of contractors and subcontractors to enter into agreements on their behalf??  Is that their only option for unwittingly entering contract terms to which they may object?  I’d love to hear your thoughts.

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And now, a postscript on last month’s post reporting that New Jersey and Missouri refused to enforce arbitration clauses where there was a problem identifying the administrator.  Turns out, other courts have been thinking about the same issue, but resolving it differently.  In Paulozzi v. Parkview Custom Homes, 2018-Ohio-4425 (Ohio Ct. App. Nov. 1, 2018), the Ohio Court of Appeals enforced the parties’ arbitration agreement, even though it called for administration by a now-defunct ADR institution (not NAF).  The Ohio court just severed that aspect of the arbitration clause and called on the trial court to appoint a replacement arbitrator.  In Beltran v. AuPairCare, Inc., 2018 WL 5571319 (10th Cir. Oct. 30, 2018), the arbitration agreement allowed the employer to select the arbitration provider.  The court found that unconscionable, but instead of invalidating the entire arbitration agreement, it also severed that provision and noted that both the FAA and California’s arbitration statutes provide alternate methods of selecting an administrator.

Those two cases make Missouri and New Jersey look out of step.  But, Missouri may now be alone.  I understand that the New Jersey courts have “withdrawn” the decision in Flanzman, and indeed I cannot find it on Westlaw.

**Big thanks to my friends in NJ, Ohio, and NY who alerted me to these developments.

 

Almost a year ago, the Second Circuit praised the clean, readable design of Uber’s app.   Because the reference to Uber’s terms of service was not cluttered and hyperlinked to the actual terms, the Second Circuit held Uber could enforce its arbitration agreement and the class action waiver within it.  But, just last week, the First Circuit disagreed.  In Cullinane v. Uber Technologies, Inc., 2018 WL 3099388 (1st Cir. June 25, 2018), it refused to enforce an arbitration clause in Uber’s terms of service and allowed a putative class action to proceed.  The First Circuit found customers were not reasonably notified of Uber’s terms and conditions, because the hyperlink to those terms was not conspicuous.

The Cullinane opinion was applying Massachusetts law on contract formation.  Massachusetts has not specifically addressed online agreements (or smart phone apps), but in analogous contexts has held that forum selection clauses should be enforced if they are “reasonably communicated and accepted.”  In particular, there must be “reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent.”  The Meyer opinion was applying California law on contract formation.  But the test was identical, because both states had borrowed it from a Second Circuit decision about Netscape.  So, the state law at issue does not explain the different outcome.

The one thing that might explain the different outcome is that the two federal appellate courts appear to have analyzed slightly different versions of Uber’s app.  In Cullinane, the lead plaintiffs had signed up between Dec. 31, 2012 and January 10, 2014.  (The court reproduced the actual screen shots early in its opinion.)  In Meyer, the lead plaintiff had signed up in October, 2014, and Uber had altered the design of its sign-up screens.  (There, the screen shot is an addendum to its opinion.)  For example, the background was now white in late 2014, instead of black, and the “Terms of Service & Privacy Policy” were in teal, instead of white text.

And, those are some of the aspects of the design that the First Circuit pointed to as critical.  It noted that hyperlinked terms are usually in blue text and underlined, but that the Cullinane plaintiffs’ were faced with hyperlinked “Terms of Service” that were not blue or underlined.  Instead, they were in white text in a gray box, no different than other non-hyperlinked text like “scan your card” on the same screen.   In addition, the First Circuit found the text stating “by creating an Uber account you agree to the [Terms]” was insufficiently conspicuous for similar reasons.  For those reasons, the Cullinane opinion found “the Plaintiffs were not reasonably notified of the terms of the Agreement, they did not provide their unambiguous assent to those terms.”

This is another example of how unsettled some aspects of arbitration law are (and maybe consumer contracting in general).  In Meyer, the district court had denied Uber’s motion to compel arbitration, and the appellate court reversed, granting the motion to compel arbitration.  And in Cullinane, the district court had granted Uber’s motion to compel arbitration, and the appellate court reversed, denying the motion to compel arbitration.  Those four courts were applying the exact same legal standard of conspicuousness, and reached opposite conclusions in the span of less than a year.

The lesson here is two-fold.  First, there is no clear standard for when terms on a website (or on a receipt, or in a box) are sufficiently conspicuous, so judges are left to their own devices (pun intended) to answer that question.  Second, unless an on-line provider wants judges — who are likely untrained in the psychology of consumer design related to five inch screens (and may not even have any apps) — to keep on getting to whatever result they please, the only solution is to require a consumer to actually click “I agree” after viewing a screen of the terms and conditions.  Unless, of course, SCOTUS grants certiorari of this new “circuit split” and issues guidance…

 

SCOTUS finally delivered its decision today in Epic Systems Corp. v. Lewis, the consolidated case that addresses whether employers can require employees to give up their right to class or consolidated litigation as part of an arbitration agreement.  In a 5-4 decision authored by Justice Gorsuch, the Court found that class action waivers are enforceable under the FAA, and nothing in the labor laws preclude that conclusion.

As usual, how the Court frames the question gives away its answer.  Justice Gorsuch began the majority opinion by asking: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”* In contrast, Justice Ginsburg’s dissent frames the issue as “Does the [FAA] permit employers to insist that their employees, whenever seeking redress for commonly experienced wage loss, go it alone, never mind the right secured to employees by the National Labor Relations Act . . . ‘to engage in . . . concerted activities’ for their ‘mutual aid or protection'”?

The majority opinion started by painting the NLRB’s opposition to class action waivers as a sudden shift after 77 years of peaceful coexistence with the FAA.  It then finds that the NLRA cannot be applied via the savings clause of Section 2 of the FAA because it interferes with one of arbitration’s fundamental attributes — individual resolution — and therefore is not the type of defense that applies to any contract. (It cites Concepcion for the proposition that individual resolution is fundamental to arbitration.)

After finding nothing in the FAA itself that would prevent enforcement of the class action waivers at issue, the majority opinion looks to see if the NLRA clearly and manifestly indicates that Congress intended to override the FAA.  It finds no statutory or contextual evidence of that clear intent.  It also made short work of the employees’ argument for Chevron deference to the NLRB.  [One of the best lines from the opinion is in that section.  Noting that Chevron was based, in part, on the idea that policy choices should be left to the executive branch which voters can hold accountable, the majority writes: “whatever argument might be mustered for deferring to the Executive on grounds of political accountability, surely it becomes a garble when the Executive speaks from both sides of its mouth, articulating no single position on which it might be held accountable.”]

Interestingly, the majority decision acknowledges that there is a vigorous policy debate over the merits of class action waivers in arbitration.  At multiple points during the opinion Justice Gorsuch bows to the possibility that the FAA could be flawed: “You might wonder if the balance Congress struck in 1925 between arbitration and litigation should be revisited in light of more contemporary developments.”  And later “This Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”  But each time he returns to the idea that the Court is bound by the law to rigidly enforce arbitration agreements.  In her dissent, Justice Ginsburg agrees that Congress is now the right branch of government to act.  The dissent states: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”

The dissent would hold that Section 7 of the NLRA does guarantee the right to pursue collective litigation and trumps the FAA.  The dissent reviews the text and legislative history of the NLRA to support its conclusion and addresses the majority’s arguments.  What I found most interesting in the dissent, however, was its review of the legislative history behind Section 1 of the FAA.  Apparently, organized labor was concerned about the FAA’s impact, and Herbert Hoover amended the legislation to specifically exclude workers’ contracts.  Congress passed the amended version and labor withdrew its opposition.  [Justice Ginsburg’s research on that topic may come in handy next term when the Court addresses the New Prime case.]

This is the result that everyone expected based on oral argument and the current politics of the court.  But still, when I read the “Justice Gorsuch delivered the opinion of the Court,” I can’t help feeling like it should say “Justice Gorsuch delivered on President Trump’s promises of a conservative court.”  Would it have been better to just let the new appointments to the NLRB reverse the Board’s course of action, much like the reversals of other agencies, and save the Court from this particular insertion into politics?

*  (Do you hear that growly “one on one” from this song when you read that?   Maybe it’s just me.)

 

Despite how often I talk about whack-a-mole and the tug-of-war between the state courts and SCOTUS on arbitration, the truth is that the majority of state supreme courts follow SCOTUS’s arbitration precedent (whether holding their noses or not, we don’t know). Recent weeks have given us multiple of those pro-arbitration state court decisions to highlight – from Alabama, Rhode Island, Texas, and West Virginia.  Yes, that West Virginia.

In STV One Nineteen Senior Living, LLC v. Boyd, 2018 WL 914992 (Alabama Feb. 16, 2018), the Supreme Court of Alabama enforced the arbitration agreement in the admission documents of an assisted living facility.  The trial court had denied the facility’s motion to compel arbitration without explanation.  On appeal, the supreme court found the language of the arbitration agreement, which required arbitration of “any controversy or claim arising out of or relating to” the parties’ agreement, was broad enough to cover the tort claims asserted.

In Disano v. Argonaut Ins. Co., 2018 WL 1076522 (R.I. Feb. 28, 2018), the Supreme Court of Rhode Island refused to vacate an arbitration award.  Although the losing party argued that the panel of arbitrators had miscalculated damages, the supreme court applied a very deferential standard of review and noted that even if the arbitrators’ math skills were lacking, that “does not rise to the level necessary to vacate such an award.”

In Henry v. Cash Biz, 2018 WL 1022838 (Tex. Feb. 23, 2018), the Supreme Court of Texas found that a pay day lender did not waive its right to arbitrate by alerting the district attorney’s office to the borrowers’ conduct (issuing checks that were returned for insufficient funds).  The trial court had denied the lender’s motion to compel arbitration, the court of appeals had reversed, and the supreme court affirmed the intermediate appellate court.  It found: 1) that the borrowers’ claims of malicious prosecution were within the scope of the arbitration clause; and 2) that the lender’s status as the complainant in the criminal charge was not sufficient to prove that it “substantially invoked the judicial process.”  [Recall that Mississippi’s high court reached the opposite result in a very similar case just a few months ago.]

In another waiver case, the Supreme Court of Appeals of West Virginia held that a party’s “pre-litigation conduct” did not waive its right to arbitrate. In Chevron U.S.A. v. Bonar, 2018 WL 871567 (W. Va. Feb. 14, 2018), the trial court had denied Chevron’s motion to compel arbitration.  It found that Chevron’s decision to take actions consistent with its interpretation of the parties’ agreement had waived the right to arbitrate, because Chevron had “unilaterally decided” the questions instead of posing them to an arbitrator.  On appeal, the supreme court found “such a result simply is unreasonable” and “absurd.”  Therefore, it reversed with instruction for the trial court to issue an order compelling arbitration.

Just two days later, the Supreme Court of Appeals of West Virginia enforced the arbitration agreement in a contract of adhesion, again reversing the decision of a trial court. In Hampden Coal, LLC v. Varney, 2018 WL 944159 (W. Va. Feb. 16, 2018), an employee sued his employer and the employer moved to compel arbitration.  In response, the employee argued the arbitration clause was unenforceable.  On appeal, the supreme court clarified that it applies “the same legal standards to our review of all arbitration agreements,” and not a special standard if they involve employees or consumers.  It then found that the mutual agreement to arbitrate was sufficient consideration for the arbitration clause and that the arbitration clause was not unconscionable.

In a fitting ending to a post about high courts,  our nation’s highest court has agreed to decide a new arbitration case.  The case, New Prime Inc. v . Oliveiracomes from the 1st Circuit and raises two questions: whether a court or arbitrator should decide if an exemption to the FAA applies; and whether the FAA’s exemption (in Section 1) includes independent contractors.

The Supreme Court of Nebraska gave an unpleasant surprise to its trial court judges last week: they cannot enforce arbitration agreements sua sponteBoyd v. Cook, 298 Neb. 819 (Feb. 2, 2018).

The case involved a messy shareholder dispute.  A key contract to the dispute contained an arbitration provision covering “any dispute or controversy arising out of” the agreement.  The suit began in April of 2014, and eventually included many parties and at least a dozen claims.  In 2016, the trial court granted partial summary judgment.  But then it had apparently had enough.  In January of 2017, the trial court “dismissed sua sponte all of the claims in the case” other than one, based on the arbitration provision in the contract.  It found it lacked jurisdiction.

After confirming its appellate jurisdiction, and noting that arbitration clauses can never defeat a court’s subject matter jurisdiction (Dude! Don’t get your hackles up), the Nebraska Supreme Court got around to the good stuff.  It found that because arbitration is a contractual right “it necessarily follows that this right may be enforced only by a party to the contract.”  Therefore, “it is improper for a court to try to enforce such a contractual right on behalf of the parties.”  Trial courts will have to resort to other tactics in getting irritating cases off their dockets.

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If the Boyd case can be described as parties ignoring their rights to arbitrate, then a Vermont case can be described as a party ignoring its potential right to litigate.  In Adams v. Barr Law Group, 2018 WL 671444 (Feb. 2, 2018), a law firm tried to recover unpaid fees from its client in arbitration.  The client participated in arbitration (without counsel) for seven months.  Then, one week before the hearing, it alleged for the first time that the arbitration agreement was unenforceable, because the law firm did not fully explain to the client the ramifications of agreeing to arbitration.  The arbitrator denied the motion to dismiss and issued an award in favor of the law firm.  The client then moved to vacate the award and lost.  On appeal, the Vermont Supreme Court explained that the client had waived its right to object to arbitration by participating fully for seven months without raising the issue.  It noted that the requirement is “designed to avoid unnecessary investments in time and resources of exactly these types.”

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Finally, another post script to the SCOTUS preview : a new cert petition raises the circuit split over the “wholly groundless” doctrine.  Maybe the Court will finally bite on one of my favorite issues!

In a recent opinion, the Fourth Circuit cited waiver as its basis to refuse to compel arbitration, but the result seems animated by a sense that the arbitration agreements were unenforceable.  Degidio v. Crazy Horse Saloon & Restaurant, Inc., __ F.3d __, 2018 WL 456905 (4th Cir. Jan. 18, 2018).

The case involved a putative collective and class action case by “exotic dancers” at a club in South Carolina, alleging they were wrongly classified as independent contractors and thereby denied minimum wages and other statutory protections.  The complaint was filed against the club in August of 2013.  [I can’t call it a saloon.  We aren’t in the wild west.]  At that point, it is undisputed that none of the potential plaintiffs had arbitration agreements with the club.

The club participated in discovery for a year.  In November and December 2014, the club obtained arbitration agreements with some of its dancers “as a condition of performing.”  In December of 2014, the club moved for summary judgment on the merits, arguing the dancers were properly classified as independent contractors.  Then in January of 2015, the club brought a motion to compel arbitration against plaintiffs who had signed arbitration agreements.  The district court denied the motion, raising concerns about the enforceability of the arbitration agreements.  The club brought a new summary judgment motion on the merits in October of 2015.  When that was denied, the club sought additional discovery on the merits, attempted to certify questions to the South Carolina Supreme Court, and then moved to compel arbitration against nine plaintiffs who had opted into the litigation after its last motion.  That motion was also denied.

The Fourth Circuit set the stage for its discussion by noting that litigants may waive their rights to arbitration by “substantially utilizing the litigation machinery.”  Without citing any further case law about waiver, the opinion proceeded to review the significant extent of the club’s use of “litigation machinery” (summarized above).  The court was particularly upset at the apparent gamesmanship:

The only possible purpose of the arbitration agreements, then, was to give [the club] an option to revisit the case in the event that the district court issued an unfavorable opinion [on summary judgment].  In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability.

In response to the club’s argument that it could not have moved to compel arbitration until the entertainers who had actually signed the agreements opted into the case, the court suggested that it should have informed the district court of its intentions so that the court did not waste judicial resources.  In addition, the court did not want to “give defendants a perverse incentive to wait as long as possible to compel arbitration.”

At the close of this waiver discussion, the court veers into what seems to be the heart of the matter: its conclusion that the arbitration agreements were “misleading” and “sham agreements.”  The arbitration agreements told the dancers that they only reason they could keep tips and set their own schedules was because they were independent contractors, and that would change if they joined the Degidio lawsuit.  The court noted that information was false.  Furthermore, the court was upset that the agreements were presented to plaintiffs “in a furtive manner,” evading the district court’s ability to supervise contact between the potential plaintiffs and counsel.  “The setting here was ripe for duress.”  However, the court does not undertake any analysis of unconscionability or other bases to find the agreements unenforceable under South Carolina law.  It just affirms the decision to deny the motion to compel arbitration.

I find this a puzzling case.  Normally, parties are allowed to agree to arbitrate a dispute that has already begun.  And litigation conduct before that agreement can’t count as a waiver.  Furthermore, parties don’t usually tell the judge about motions that they don’t yet have a basis to bring.  So, unless FLSA cases are really so different, this seems like a case that should have been analyzed on the validity of the arbitration agreements.  It is decidedly underhanded to convince people to sign arbitration agreements by misrepresenting the law.  Maybe South Carolina unconscionability doctrines are very difficult?

Whenever people ask me why I choose arbitration law to write and talk about, one of the reasons I give is that the law is in flux, creating a demand for information and analysis.  Despite the fact that the Federal Arbitration Act has been around for over 90 years, there are constantly new developments in its interpretation.  Especially in the past two decades, with the Supreme Court highly engaged in the enforcement of arbitration agreements, the pace of legal development has quickened.  That pace means that litigants, advocates, arbitrators and judges are struggling to keep up.  It also means that even on recurring issues, there is still a lack of consensus on how to apply the rules that have been developed.

To demonstrate this point, I went back through the important cases from 2017.  I found multiple instances where two cases with very similar facts received opposite results.  And I am not talking about circuit splits over novel issues like the NLRB and “wholly groundless” exception.  I am talking about issues like formation, waiver, and non-signatories, where the “rules” have ostensibly been settled for some time.

Two Tales of Non-Signatories

These two cases involve a bank teaming up with a retail entity to issue branded credit cards that offered rewards.  The credit card agreement, which called for arbitration of disputes, was only between the consumers and the banks, however. In each case, plaintiffs sued the retail entity regarding the card and the retail entity moved to compel arbitration as a non-signatory to the credit card agreement.  In one case, White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017), the retail entity’s motion was denied.  In the other, Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. Oct. 6, 2017), the retail entity’s motion was granted.  While these cases depend on the laws of different states, the courts were applying the same general estoppel rules, but reaching opposite results.

Two Tales of Waiver

Whether a party has waived its contractual right to arbitrate is an issue that comes up regularly.  Yet it remains surprisingly hard to predict whether a court will find waiver or not on any set of circumstances.

These two cases involve lenders bringing collection actions in state court for credit card debts.  In both, they were granted a default judgment.  And in both, the credit card holder later sued for problems with the collection efforts.  In response to that suit, the lenders moved to compel arbitration.  In one case, Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017), the court denied the motion to compel, finding the lender had waived its rights.  In the other, Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016), the court granted the motion to compel, finding the lender did not waive its rights.  In both cases, the analysis turned on whether the default action and later action were sufficiently related.

Two Tales of Formation

All of us do more and more of our business over mobile devices and the internet, where we don’t physically sign our name to contracts, and in fact we generally don’t read the terms and conditions.  That leads to hard legal questions over when a contract is validly formed and what terms the parties agreed to.

In these two cases, consumers have little or no choice between providers.  In order to sign up for the service, they receive one message.  In the first case, the message is “your account…[is] governed by the terms of use at [defendant’s website].”  In the second case, the message is “by creating an [] account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The consumers did not have to take any affirmative act to consent to the terms other than proceeding to set up their account.  In both cases, consumers later sued the provider and the providers moved to compel arbitration based on the terms available at their websites.  The consumers responded by arguing the parties had not validly formed any arbitration agreement.

In the first case, the provider was not successful in compelling arbitration.  James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017).  In the second case, the provider was successful in compelling arbitration.  Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. Aug. 17, 2017).  Can it be that the wording difference between “your account.. is governed” and “by creating an account, you agree” explains the outcomes?  Or the fact that the consumers in the Uber case could have just clicked on the terms from the same device they were using to set up the account, while the prisoners in the first case would have had to hang up their telephones, find a computer and find the website?  The cases really give us no assistance in figuring that out.

Maybe every area of law has similar issues regarding the predictability of decisions.  But arbitration law is rife with legal “rules” to guide decision making that are so flexible as to hardly constitute rules at all.  And courts have not yet applied those rules enough times to allow them to develop a systemic approach, with internal consistency between the decisions.  And I predict that will only get worse, not better, as consumers and employees find new and creative ways to challenge arbitration agreements.

Last Thursday, the Second Circuit found that the arbitration agreement in Uber’s Terms of Service was conspicuous enough to be binding and enforceable.  As a result, the claims of a putative class of consumers will be dismissed unless they can show that Uber waived its right to arbitrate their claims.  Meyer v. Uber Technologies, Inc., 2017 WL 3526682 (2d Cir. Aug. 17, 2017).  [This proves my point from last week, that formation is one of the big issues this year in arbitration law.]

For those of you who still take yellow taxis, Uber is a “ride-hailing service,” where customers use an “app” on their smart phones to alert a nearby Uber driver that the customer wants a ride to a specific location. Critically to this case, when customers open an account with Uber, they see black text at the bottom of the registration screen advising that “by creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The phrase “terms of service” is in blue font and hyperlinked to a page where the customer can read those terms.  The terms include an arbitration agreement that waives the right to any class or consolidated action.

A potential class of Uber customers started a lawsuit in New York alleging that Uber allows illegal price fixing.  In response, Uber first moved to dismiss for failure to state a claim.  Upon losing that motion, Uber moved to compel arbitration and the federal district court denied that motion also, finding that the parties never formed an arbitration agreement because the consumers did not meaningfully consent.

On appeal, the Second Circuit vacated and remanded.  It applied California contract law in its de novo review, and applied California’s rule that a customer who lacks actual notice of the terms of an agreement can be bound if a “reasonably prudent user would be on inquiry notice of the terms.”  In its analysis, the court noted that Uber did not use a “clickwrap” agreement, which involves consumers having to click “I agree” after being presented with a list of terms and conditions, and which is “routinely uph[e]ld” by courts.  Even so, the court concluded that the design of the registration screens were clear enough to put the plaintiff on inquiry notice of the arbitration provision.  What were those design features?

  • Hyperlinked text to terms and conditions appears right below the registration button;
  • The entire screen is visible at once (no scrolling required);
  • The screen is “uncluttered”; and
  • Although font is “small,” dark print contrasts with white background.

Therefore, the Second Circuit concluded that the named plaintiff “agreed to arbitrate his claims with Uber.”  However, the Court threw the class a bone by remanding on the question of whether Uber waived its right to arbitrate by bringing the motion to dismiss on the merits.

What’s fascinating about this opinion is not just that Uber is a famous company that is facing intriguing antitrust allegation.  No, what’s fascinating from the arbitration angle is that the Second Circuit came out on the opposite side of this same issue almost exactly one year ago in Nicosia v. Amazon.com, Inc., 2016 WL 4473225 (Aug. 25, 2016).  The same judge wrote both opinions.

In Nicosia, the named class representative had placed an order on Amazon in 2012.  Instead of a true “clickwrap” agreement, there was simply language on the Order Page stating that “by placing your order, you agree to Amazon.com’s privacy notice and conditions of use.” The conditions of use were hyperlinked to the relevant terms.  Sounds pretty much the same as Uber’s setup, right?  Well, applying Washington law, the Second Circuit found that reasonable minds could differ about whether that notice was sufficiently conspicuous to be binding.  It complained that the critical sentence was in a “smaller font,” that there were too many other distracting things taking place on the order page (summary of purchase and delivery information, suggestions to try Amazon Locker, opportunity to enter gift cards and have a free trial of Amazon Prime, for example.)  There were other links on the page, in different colors and fonts.  Critically, it found “[n]othing about the’Place your order’ button alone suggests that additional terms apply, and the presentation of terms is not directly adjacent to the ‘Place your Order” button…”  Therefore, the Second Circuit reversed the district court’s dismissal based on the arbitration provision.

As the fundamental context of on-line purchases has not changed in the last year, and the Second Circuit’s recitation of California and Washington law appears pretty similar, one has to conclude that the difference between these two cases is the graphic design of the key pages.  In particular, the level of “clutter” on Amazon’s page is the primary difference-maker between these two cases.  I imagine many internet retailers will reconsider the number of fonts, colors, and promotions on their final “order” pages this next week…

 

This is my 290th post at ArbitrationNation and today I celebrate six years of blogging.  Woo hoo — that’s longer than most celebrity marriages!  In honor of the occasion, here are updates on six of the hottest issues in arbitration law so far this year.

  1. Agency regulation of arbitration agreements.  On the one hand, the CFPB issued a rule that will preclude financial institutions from using class action waivers in arbitration agreements.  To understand how “yuge” this is, remember that the CFPB’s initial study showed there are likely over 100 million arbitration agreements impacted by this rule.  (And there does not seem to be the necessary political willpower to stop it.)  On the other hand, agencies headed by Trump appointees have moved to roll back Obama-era consumer-friendly regulations of arbitration agreements in nursing homes and educational institutions.
  2. NLRB.  While the CFPB attacks class action waivers in the financial industry, the NLRB has been attacking those waivers in the employment context, taking the position that such waivers violate the National Labor Relations Act.  A circuit split developed, with the 6th, 7th, and 9th circuits on NLRB’s side, and the 2nd, 5th and 8th circuits siding with the employers.  The Supreme Court will hear arguments on October 2.
  3. Wholly Groundless.  When considering whether to enforce delegation clauses, some federal court have developed a carve-out for claims they think are nothing but hot air.  [Remember delegation clauses are those portions of arbitration agreements that authorize arbitrators to determine even arbitrability — whether the arbitration agreement is valid and encompasses the claims — issues usually decided by courts.]  That carve-out has been called the “wholly groundless” exception, and it is coming up with greater frequency.  Currently there is a circuit split: the 5th, 6th and federal circuits are in favor of spot-checking claims of arbitrability (e.g. Evans v. Building Materials Corp. of Am., 2017 WL 2407857 (Fed. Cir. June 5, 2017)), while the 10th and 11th Circuits believe SCOTUS’s precedent leaves no room for conducting a smell test (e.g. Jones v. Waffle House, Inc., 2017 WL 3381100 (11th Cir. Aug. 7, 2017)).
  4. Formation.  SCOTUS decided the Kindred case in May, confirming that state law on contract formation is also subject to preemption by the Federal Arbitration Act.  That was timely, given that plaintiffs appear to be placing their bets on challenging formation as the most effective way around an arbitration agreement.  They might be right.  See James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017); Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017); King v. Bryant, 795 S.E.2d 340 (N.C. Jan. 27, 2017).
  5. Small Claims Court.  If a company starts a small claims court action to collect a debt, does that waive the company’s right to compel arbitration years later in response to a suit by the consumer?  This is a question multiple courts are facing, with differing results.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017) (waiver); Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016) (no waiver); Citibank, N.A. v. Perry, 797 S.E.2d 803 (W. Va. Nov. 10, 2016) (no waiver).  It is important because many consumer arbitration agreements exempt small claims from arbitrable claims, but may reconsider if that is considered a waiver of everything else.
  6. Statutory Preclusion.  The Federal Arbitration Act generally requires courts to enforce arbitration agreements.  But, if there is a contrary congressional command entitling the litigant to a court trial, it can override the FAA.  That issue has already come up multiple times this year, with the FAA generally winning its battles with other statutes.  E.g., McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. Apr. 14, 2017).

Thanks to all of you for providing great feedback, leads on cases and topics, client referrals, and a warm community of fellow arbitration geeks.  I look forward to another year of blogging.