Monday, January 27, 2014
Last week, we noted Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana. This week, we will be summarizing some of the important cases discussed in that article.
East Porter County School Corporation v. Gough, Inc. is a pretty typical bid case. Gough, Inc. (Gough) submitted a bid of around $3 million to the East Porter County School Coporation (the County) on some additions, presumably to school buildings. Just after the deadline for the submission of bids, but likely before the bids were unsealed, Gough tried to withdraw its bid, claiming that its bid was the result of an inadvertent clerical error. One month later, the County awarded the contract to Gough. Gough's president notified the County that the bid was incorrect and stated that Gough would not accept the contract. Gough returned the contract to the County unsigned.
When the County tried to enforce the contract, Gough brought suit, seeking a declaration that its bid be rescinded and its bid bond released. The County counterclaimed, alleging breach of contract by both Gough and its bid bonding agency, Travelers Casualty and Surety Company of America (Travelers). The trial court granted the Gough and Travelers summary judgment, citing a 1904 case that permitted excuse of a contractor's bid based on mistake.
The law in Indiana excuses bids based on mistakes in calculation or clerical errors but not based on errors in judgment. Gough's presidnet submitted an affidavit in which he stated that on the day that Gough submitted its bid, its total of the bids of its subcontractors and its own cost estimates came to just over $3.3 million. "For psychological reasons," Gough wanted to get the bid below $3.3 million, but they spoke of trying to get to 299 or 2998. They thus mistakenly wrote down a bid of $2.998 million, which they then arbitrarily cut down to $2,997,900, when they apparently intended $3,299,700. Gough then quickly realized that the error would result in a $200,000 loss on the project, so Gough attempted to pull the bid.
The Court of Appeals found that, as a result of the error, the minds of the parties never met and the County "would obtain an unconscionable advantage" as a result of Gough's mistake. Because Gough timely notified the County of the mistake, the County was not in any way harmed by its withdrawal of its bid. As a result, the Court ruled that the County had no right to enforce Gough's erroneous bid, nor did Traveler's have any obligation to pay its bid bond.
I have no problem with this result, but the "meeting of the minds" language strikes me as misplaced in this context. Many contracts professors dislike the phrase "meeting of the minds" because it suggests that subjective agreement on terms is what is required when the test for whether or not a contract formation is objective. Twenty bishops could attest to Gough's president's veracity and still he would be bound if a contract had actually been formed. But here no contract was formed because the bid was withdrawn before it was accepted. In this circumstance, courts should really only ask two questions. First, was the bid irrevocable? If so, Gough should bear the burden of its own mistake -- and the existence of the bond suggests that the parties have allocated the burden. If not, the second question is whether the bid was relied upon, and it was not. So really the case should turn on whether or not the bid was irrevocable and not on whether the parties "minds" met or on how the court categorizes Gough's mistake.
This is not to find fault with the Court in this case, which simply followed Indiana precedent. But the case nicely illustrates the difficulties in distinguishing between clerical or calculation errors and errors of judgment. Sure, Gough's principals made a clerical mistake reducing their bid by $330,000 when they meant to reduce it by only $30,000, but one could also argue that the decision to reduce the bid is a judgment, especially when one does so for "psychological reasons." Once they made the decision to reduce their bid, the fact that they committed a clerical error in carrying out that judgment is epiphenomenal.
Sunday, January 5, 2014
The recent discussion of the December 2013 decision by the Ninth Circuit in In re Wal-Mart Wage & calls to mind the contrast in attitudes between international and domestic practice. Mention “arbitration” among international practitioners and profs, and you are likely to get a bit of a swoon from most – arbitration, properly structured, rescues us from the risks and uncertainties of unfamiliar legal systems and provides a comfort level in terms of predictability of process if not outcome. Mention "arbitration" in domestic circles, particularly with respect to consumer protection issues, and you encounter a growing skepticism if not outright hostility about the imposition of arbitration as an exclusive contract remedy.
There are delicate ironies in these contrasting attitudes. Many would say that the contrast – to the extent it actually exists – simply reflects the difference between complex disputes at the “wholesale” level, between commercial actors with more or less equal bargaining power, and consumer disputes in which arbitration is imposed by the dominant party on the “retail” party. However, In re Wal-Mart itself undermines that neat dichotomy, since it involves parties with, presumably, more or less equal bargaining power. In any event, there is certainly nothing in principle or in text that suggests a wholesale-retail split in the approach to deciding arbitration challenges. (Consider, for example, the Supremes’ 2011 AT & T Mobility LLC v. Concepcion, upholding an arbitration provision in a class-action consumer suit, and the Ninth Circuit’s own 2003 en banc decision in Kyocera Corp. v. Prudential–Bache Trade Servs., Inc., upholding arbitration in what was ostensibly a “wholesale” transaction between commercial parties.) It is nevertheless clear that there is a growing conception – or preconception – that arbitration clauses may be hostile to, or at least incompatible with, consumer interests.
This conception does have textual support in the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1414(a) of the Act added a provision to the Truth in Lending Act, 15 U.S.C. § 1639c(e)(1), that prohibits the inclusion in any home mortgage or home equity loan of “terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.” However, as with so many of the provisions of the Dodd-Frank Act, § 1639c contained a special delayed effective date, namely, the date on which final regulations implementing the prohibition took effect, or a date 18 months after the transfer of authority to the new Consumer Financial Protection Bureau, whichever is earlier. Nevertheless, in the November 2013 case State ex rel. Ocwen Loan Servicing, LLC v. Webster, the Supreme Court of Appeal of West Virginia found that the delayed effective date “only applies to those portions of Title XIV that require administrative regulations to be implemented.” Accordingly, the effective date of this prohibition was the general effective date of the act, July 22, 2010. Good for us, not so good for the consumer plaintiffs suing the mortgage servicer, since their mortgage agreement containing an arbitration clause was entered into several years prior to the enactment of the Dodd-Frank Act. The West Virginia court refused to apply the Dodd-Frank Act retroactively, and proceeded to decide that it was compelled to enforce the arbitration clause in light of the mandate of the Federal Arbitration Act, which generally favors the application and enforcement of such clauses, despite the plaintiffs’ claims that the arbitration clause was procedurally and substantively unconscionable. Ocwen Loan Servicing is worth a careful read, particularly in light of its consideration of the interplay among emerging statutory policy with respect to consumer protection, general federal policy in favor of arbitration, and the contract doctrine of unconscionability.
Tuesday, December 31, 2013
This case is fodder for Nancy Kim's work on wrap contracts.
In 2008, Donovan Lee purchased an Internet background check and report from a company called Intelius. Lee confirmed this purchase when he clicked "yes" on Itelius's webpage, where its name was the only company name to appear. In fine print on that page, he was informed that by clicking yes and looking at the report he was seeking he was also agreeing to a seven-day free trial of a "Family Safety Report" for which he would be billed $19.95/month after the seven-day trial lapsed. Lee noticed the monthly charges, from a company called Adaptive Marketing, after the company had been charging his credit card $19.95 for about a year. Lee and other named plaintiffs brought a state-law class action against Intelius, which impleaded Adaptive Marketing as a third-party defendant.
Claiming that Lee had agreed to arbitrate any claims he would have against Adaptive Marketing when he clicked "agree" on Intelius's website, Adaptive Marketing moved to compel arbitration. The District Court denied that motion, and on December 1th, the Ninth Circuit affirmed in Lee v. Intelius, Inc.
The Court's description of the Intelius webpage's architecture is quite elaborate. It seems that Lee was lured into his trial membership with Adaptive Marketing when he took a two-question survey in return for $10 cash back (which he claims he never received) should he try "Family Safety Report." After taking the survey, it appears that Lee had the option of just seeing the background check that he was interested in or also getting the Family Safety Report on terms provided through another link. The "yes" button was large and orange. The "no" button was smaller and featured a smaller font. Lee testified that he did not read the text of the smaller button, as his eye was drawn to the large orange button. He also did not read Intelius's terms and conditions, which included an arbitration clause.
The District Court found that Lee had entered into a contract with Adaptive Marketing to purchase the Family Safety Report but had not entered into a arbitration agreement with that company. The Ninth Circuit, applying Washington state law, found that Lee had entered into no contract with Adaptive Marketing, and therefore had no arbitration agreement with the company.
The Ninth Circuit found no contract because it concluded that Intelius's webpage was "designed to deceive" Lee and others like him. While a careful consumer would have read the entire webpage, the District Court had noted, Lee's conduct was not careful but also not unreasonable:
A less careful, but not unreasonable, consumer could conclude that providing Intelius with his email address and clicking the big [orange] “YES” button would reveal the report he had been trying to get for an undisclosed number of screens. Because the consumer never selects an additional product or service and is not asked for his account information, he could reasonably believe, based on his past experiences with internet transactions, that there would be no unpleasant surprises on his credit/debit account.
On this basis, the Ninth Circuit expressed skepticism regarding whether Lee had made an objective manifestation of consent to a contract with Adaptive Marketing. But because that issue was uncertain, the Ninth Circuit ruled on other grounds. Washington law requires that the "essential elements" of a contract be set forth in writing. Identification of the parties to an agreement is one such essential element, and it was lacking in this instance, since Adaptive Marketing's name did not appear. Even a cautious consumer would have thought she was contracting with Intelius.
In addition, the Ninth Circuit agreed with the District Court that even if there were a contract between Lee and Adaptive Marketing, there was no agreement to arbitrate. As the District Court put it:
The Ninth Circuit agreed.
The Court noted as an aside that the federal government prohibited the so-called "data pass" method employed on Intelius's website in the 2010 Restore Online Shoppers' Confidence Act (ROSCA).
Monday, December 30, 2013
I have been thinking a lot about Peggy Radin's book Boilerplate and her arguments about how boilerplate contacts threaten a democratic degradation (discussed elsewhere on the blog by Brian Bix, with Peggy Radin responding here, and by David Horton) because they permit private parties, powerful companies, to negate statutory or common law rights. The Ninth Circuit has put its foot down and refused to permit a potential innovation in the direction of democratic degradation, but the odd thing about the case is that the arbitration agreement at issue here seems to have been among parties with fairly even bargaining power.
On December 17, 2013, the Ninth Circuit issued its opinion in In re Wal-Mart Wage & Hour Employment Practices Litigation, affirming the District Court's confirmation of an arbitration award and rejecting appellee's argument that the Court was without jurisdiction because the parties agreed to binding, non-appealable arbitration.
The dispute at issue arose in the aftermath of an $85 million settlement agreement between Wal-Mart and a class of employee-plaintiffs. As part of that settlement, the parties agreed to have all disputes as to fees decided by an arbitrator. The District Court awarded $28 million in attorneys' fees, but plaintiffs' counsel quarreled over the proper allocation of that fee award. That dispute was submitted to "binding, non-appealable arbitration."
The arbitrator divided the fee among three law firms, and one of them brought suit in District Court challenging the allocation. The District Court found no grounds to vacate the arbitrator's award, and the law firm that challenged the award appealed. The firm that got the lion's share of the fee award argued that there could be no appeal due to the "non-appealable" language in the arbitration agreement.
The Ninth Circuit found the language of the agreement ambiguous. "Non-appealable" could just preclude courts from reviewing the merits of the arbitrator's decision, or it could mean that no federal court could exercise jurisdiction in the case. The Ninth Circuit concluded that the second meaning would be unenforceable in any case, as inconsistent with the provision for judicial review of arbitration awards under Section 10 of the Federal Arbitration Act (FAA). Citing Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), in which the Supreme Court rejected an arbitration agreement that expanded the grounds for judicial review of an arbitration award, the Ninth Circuit reasoned that "[j]ust as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract." As if the Court had the concept of democratic degradation in mind, the opinion continues:
Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration. . . . If parties could contract around this section of the FAA, the balance Congress intended would be disrupted, and parties would be left without any safeguards against arbitral abuse.
In a separate memorandum disposition, the panel affirmed the District Court's confirmation of the aribral award.
Tuesday, December 24, 2013
Since I am getting ready to teach Business Associations for the first time in three years, it is nice to have a case that reviews basic agency principles:
On November 25, 2013, a panel of the Seventh Circuit issued a per curiam decision in NECA-IBEW Rockford Local Union 364 Health and Welfare Fund v. A & A Drug Co. and upheld a district court's grant of defendant's motion to compel arbitration. Plaintiff (the Fund) provides health benefits to a Rockford union of electrical workers (Local 364). In 2002, it negotiated an agreement (the Local Agreement) with Sav-Rx, a provider of prescription drug benefits. In 2003, Sav-Rx also negotiated a different agreement (the National Agreement) with the International Brotherhood of Electrical Workers, with which Local 364 is affiliated. The National Agreement offers locals reduced charges, but it, unlike the Local Agreement, contains an arbitration clause.
While the Fund's trustees never voted on the matter, the Fund accepted Sav-Rx services provided under the National Agreement between 2003 and 2011. The process by which this occurred is unclear. The Fund never actually signed the Local Agreement, but Sav-Rx began providing services under the agreement as of January 1, 2003. After the National Agreement was announced at at a meeting attended by the Chair of the Fund's Board of Trustees, the Chair requested that Sav-Rx reduce its rates to comport with those of the National Agreement. Sav-Rx did so effective April 1, 2003. Sav-Rx included Local 364 in its annual audits under the National Agreement, and the Fund's administrative manager communicated with Sav-Rx about these annual audits.
The Fund is now suing Sav-Rx for charges not authorized under either the Local or the National Agreements. Sav-Rx moved to compel arbitration pursuant to the National Agreement. The Fund claimed that it had never signed the National Agreement and should not be bound to its terms. The district court found that the Fund had knowingly accepted benefits under that Agreement and had thereby ratified it, thus acceeding to its arbitration clause. The Seventh Circuit affirmed.
The Seventh Circuit noted that the Fund is bound to the National Agreement if the Fund or an agent with actual, implied, or apparent authority, assented to it, or if the Fund ratified it. As the Fund's Trustees had never voted on the National Agreement, the Fund was not bound under actual authority. Nor did the Chair of the Board of Trustees possess implied authority to bind the Fund to the National Agreement, which did not relate to ordinary day-to-day affairs but was an "extraordinary," "once-in-a-decade transaction" that also caused the Fund to forego an important right -- access to the courts. Sav-Rx could not establish that the Chair of the Board of Trustees had apparent authority to bind the Fund to the National Agreement. The Board had never held out the Chair as having such authority and Sav-Rx in fact knew that only the Board itself could bind the Fund.
Nevertheless, the Fund is bound by the National Agreement because it ratified that agreement through its conduct. By imputation or direct knowledge, the Trustees knew of both the National and the Local Agreements and of their differences. They also knew that the Fund was receiving discounted prices. The Seventh Circuit concluded that "knowing that the Fund received the benefits of the National Agreement and never repudiating those benefits, the trustees ratified the National Agreement."
Monday, December 23, 2013
One of the unexpected benefits of global acquisitions and diversification of multinational enterprises is that the companies occasionally pop up in interesting contracts cases. Such is the situation in Hoffman v. Daimler Trucks North America, LLC, a case from the Western District of Virginia involving the purchase of an RV that was such a lemon only the mice could love it. Daimler Trucks, a wholly owned subsidiary of Daimler AG, got itself entangled in this case through Freightliner Trucks, its U.S. truck division, and earned itself a quick education in U.S. warranty law.
The case offers some interesting reflections on the interrelationship and interactions between state and federal law with respect to the creation and disclaimer of warranties in the consumer purchase context, as well as the role played by specialized statutes like vehicle lemon laws. Too often, the basic Contracts course barely has time to deal with UCC warranty law and lore, and so the compact treatment of these issues can be a useful hand-off for students interested in exploring some of the implications of warranty law and policy.
On the federal side, we have the Magnuson–Moss Warranty Act — affectionately known as the Federal Trade Commission Improvement Act of 1975, 15 U.S.C. § 2301 et seq. Magnuson-Moss establishes federal minimum standards for warranties if and when a written warranty is offered. If a seller does offer a written warranty to a consumer, seller may not disclaim or modify any implied warranties. 15 U.S.C. § 2308(a). Any written warranties must be made available to the consumer prior to the sale. 15 U.S.C. § 2302(b)(1)(A).
On the state side, of course, we have substantive warranty law represented by the UCC. The UCC will be relevant even when Magnuson-Moss is not (i.e., when an oral, but not a written warranty is offered to the consumer). In contrast with federal law, the UCC permits disclaimer of express and implied warranties, but imposes requirements when a seller attempts to disclaim. UCC § 2-316. Hence, the applicability of Magnuson-Moss could make a substantial difference in a case where disclaimer of warranty is an important issue.
The story so far . . .
In the fall of 2010, Donald Kent Hoffman of Fishersville, Virginia, bought a Tuscany recreational vehicle from RV dealer Camping World. The RV had been manufactured by Thor Motor Coach and included a chassis built by Daimler Trucks North America and various component parts supplied by Drew Industries. To Mr. Hoffman’s deep disappointment, there were very few things about his RV that weren’t problematic, and so Hoffman and the RV spent nine out of their first ten months together off the road and in the shop. Indeed, the situation was so dire that, during one of the repair episodes at Camping World, the RV developed a mouse infestation because it was left outside for an extended period of time.
The mice were apparently untroubled by the flaws in the RV. Among other things, the automatic leveler and indicator lights did not work, nor did the water and waste water indicator lights. The aisle lights in the coach did not work. The deadbolt in the cabin did not work, but then the door didn’t lock from the inside anyway. The door did manage to leak water into the cabin when it rained, however, and the sprayer on the kitchen sink leaked. There was no heat in the vehicle. The front seat did not properly swivel or recline. The map light did not work. The airbags deflated. The driver's side mirror would not stay in place. The control panel did not function properly, nor did the window shades. The steps were installed improperly. The batteries died quickly. In addition, various features that Hoffman said he had been promised were absent from the RV – there was no GPS as promised, and no satellite television.
Daimler, trading as Freightliner, entered the story during the course of Hoffman’s tortuous attempts to coordinate warranty coverage. Camping World told Hoffman that the problem with the air bags would have to be addressed by Freightliner, but Hoffman reported back that Freightliner said it was “ok as per truck stand[a]rds.” Meanwhile, the general twelve-month warranty on the RV was set to expire on or about October 29, 2011. Before this happened, Hoffman attempted to revoke his acceptance of the RV by dropping it off at Camping World and seeking a refund of the purchase price. (The RV apparently remains at Camping World pending the outcome of the litigation, although there is no indication in the court’s opinion where the mice are at this point.)
In April 2012, the long-suffering, travel-deprived Mr. Hoffman brought suit in state court against Camping World, Daimler Trucks, Drew, and Thor for breach of express and implied warranties under Magnuson-Moss and the Virginia Uniform Commercial Code (VUCC), and against Thor under Virginia’s Motor Vehicle Warranty Enforcement Act, popularly known as the Virginia Lemon Law, Va. Code Ann. § 59.1–207.11 et seq. Thor and Camping World, the only defendants served at that point, managed to have the action removed to federal district court, since neither apparently was a Virginia resident.
At this juncture, the scope of the Virginia Lemon Law became an issue. There is some authority that the Virginia Lemon Law does not apply to a completed motor home, but only to the “self-propelled motorized chassis,” Va. Code Ann. § 59.1–207.11. Since Daimler Trucks manufactured the chassis, Hoffman amended his complaint to name Daimler Trucks as the correct defendant on the Lemon Law claim. At that point, the defendants filed motions to dismiss.
The retailer’s disclaimers
The interaction of the three relevant bodies of law – Magnuson-Moss, UCC § 2-316, and the Lemon Law – is critical to the motions to dismiss. The express warranties that Hoffman relied on in his claims against Camping World were not written, hence not covered by Magnuson-Moss, and Camping World argued that it had validly disclaimed any express warranties via a merger clause in the written contract of sale, and that it had disclaimed any implied warranties in a conspicuous manner as required by VUCC § 2-316(2).
Boldly going where most Contracts students have not gone before, Judge James C. Turk found that a merger clause in the contract of sale, coupled with the parole evidence rule embodied in UCC § 2-202, overcame Hoffman’s express warranty claim. As to the implied warranty, however, in a clear and succinct discussion Judge Turk found that the relevant disclaimer clause was not conspicuous for purposes of disclaiming the implied warranties, and he denied Camping World’s motion to dismiss as to the implied warranty claims.
The manufacturer’s disclaimers
Thor’s argument was that its written warranty reduced the limitation period to “90 days after the expiration of the [designated] warranty coverage period,” or in other words three months after the one-year warranty. However, Thor’s warranty language was ambiguous; the same page also referred to a two-year warranty on the vehicle frame, which might make the limitation period in question 27 months instead of 15 months. Rejecting the approach taken in the now-classic RV warranty case, Merricks v. Monaco Coach Corp., and relying on the limitation rules of UCC § 2-725, Judge Turk decided that “Hoffman could not accept the limitation period by passive acceptance of the RV without objection to the pertinent warranty provision.”
As to the two claims against Daimler Trucks – one for breach of express and implied warranties and the other for violation of the Lemon Law – Daimler Trucks argued that Hoffman had simply failed to state a claim for breach of warranty and that the Lemon Law claim was untimely. On the latter argument, which is somewhat beyond our scope, the court allowed relation back to the original filing date of the complaint in determining that the Lemon Law claim against Daimler Trucks in the amended complaint was not time-barred.
On the breach of warranty claim, Judge Turk agreed that Hoffman had failed to plead specific breaches attributable to Daimler Trucks, and hence dismissed the claim against the manufacturer with leave to amend. More importantly from a teaching perspective, the Daimler situation illustrates the impact of Magnuson-Moss clearly and succinctly. Daimler Trucks purported to disclaim all implied warranties in its written warranty, but that contravened Magnuson-Moss. Once the supplier gives a written warranty, it cannot wholly disclaim implied warranties. 15 U.S.C. § 2308. Hence, Hoffman’s implied warranty claims against Daimler Trucks would survive a disclaimer argument.
The supplier’s arguments
Drew, the components supplier, argued that Hoffman’s claims were untimely and that, in any event, its express and implied warranties applied only to Thor, not to the consumer. The timeliness argument neatly illustrates the difference between warranty periods and limitation periods, which, in the court’s view, Drew had confused. Drew had argued that the claims were untimely because they weren’t brought within the one-year warranty period. Judge Turk was quick to point out that “[t]he warranty and limitation periods, however, are not identical concepts. The warranty period covers the component parts for a specified period of time; in other words, it defines the time in which the warrantor has a responsibility to repair or replace the covered parts. The limitation period, however, places constraints on the time in which the buyer must sue.” Simply put, the parties had not agreed to reduce the limitations period “by the original agreement,” per UCC § 2-725(1), and so the UCC default four-year statute of limitations applied.
On the warranty issues, Drew was on stronger ground. Drew claimed that its limited express warranty extended coverage only to Thor, the initial purchaser, and not to the consumer. The Court agreed. Based on a Fourth Circuit warranty case, Buettner v. R.W. Martin & Sons, Inc., which involved a remote supplier who had not even given an express warranty to its immediate purchaser, Judge Turk argued that “an original seller is still free to disclaim warranties as to foreseeable users. . . . The Drew limited warranty plainly extended only to the initial purchaser and Hoffman is not entitled to enforce its protections.”
Drew also argued that it had effectively disclaimed all implied warranties in the text of its written express warranty, but Hoffman countered that this attempt was ineffective because Magnuson-Moss prohibits such disclaimers when the supplier provides a written warranty to a consumer. Here the court found that Magnuson-Moss was not applicable, because Drew did not offer Hoffman a “written warranty” as the term is understood by Magnuson-Moss, because the warranty was intended for the product manufacturer, not the ultimate consumer, per 16 C.F.R. § 700.3(c). Hence, the Magnuson-Moss limitation on disclaimers of implied warranties was inapplicable, and UCC disclaimer rules governed. The court found the disclaimer sufficiently conspicuous to pass muster under UCC 2-316, and it dismissed the claim against Drew.
I would recommend this case to anyone seeking an exemplary discussion of the interplay of federal, UCC, and consumer law with respect to warranties. Judge Turk is undeterred by the complexities of the overlapping issues and multiple defendants, and his analysis is clear, concise, and informative. Students looking for further guidance on these issues would benefit from a careful review of Hoffman.
Motion to Compel Arbitration Granted in Part, Denied in Part in Antitrust Case v. Cable Providers and Sports Organizations
On November 25, 2013, Judge Scheindlin of the Southern District of New York issued an opinion in Laumann v. National Hockey League, granting in part and denying in part a motion to compel arbitration brought by defendant Comcast and denying in full a similar motion brought by defendant DIRECTV. Plaintiffs claim that defendants, including the National Hockey League and Major League Baseball, along with the major cable and satellite television service providers entered into "agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts," and by "collud[ing] to sell the `out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices." These agreements allegedly violate the Sherman Antiturst Act.
At the heart of plaintiffs' beef, it seems, is that if one wants to view "out-of-market" games -- that is, games that do not feature the team from one's home city or the city where one is located -- one must purchase television packages which inculde all out-of-market games, even if one is only interested in the games of one out-of-market team.
Both Comcast and DIRECTV have customer service agreements that feature arbitration clauses and so both defedants moved to compel arbitration. Judge Scheindlin granted Comcast's motion with respect to one plaintiff who purchased an out-of-market package directly from Comcast and thus was clearly bound by the arbitration provision. The remaining plaintiffs had a more complicated relationship to Comcast and claimed that their claims did not arise directly under their customer service agreements with Comcast.
Judge Scheindlin first ruled that any colorable dispute about the scope or validity of the arbitration clause must be referred to the arbitrator. Plaintiffs colorfully objected that where the relationship between the agreements and the claims are too attenuated, granting Comcast's motion would be like compelling arbitration of a claim by a plaintiff who had been hit by a Comcast bus. Judge Scheindlin agreed with respect to one plaintiff, where "the sole nexus between his claims and his Comcast service is the allegation that his DIRECTV package contained material produced by the Comcast" Regional Sports Networks.
Comcast also sought to compel arbitration of claims brought against it pursuant to arbitration clauses in plaintiffs' agreements with DIRECTV. With respect to these claims, Judge Scheindlin noted that there was no clear intent to have questions of arbitrability between a signatory and a non-signatory decided by the arbitrator. She then ruled that the arbitration clause in the DIRECTV agreements did not encompass plaintiffs' claims against Comcast. She also rejected Comcast's claim that plaintiffs should be estopped from bringing a claim under the DIRECTV agreements through any mechanism other than arbitration.
DIRECTV's motion to compel arbitration against another plaintiff failed because the plaintiff is not a DIRECTV customer bound by its arbitration agreement. The DIRECTV subscription is in the name of plaintiff's wife, and the court rejected any claim that he could be bound by admission or estoppel.
Tuesday, December 17, 2013
Broad Arbitration Clause in Employment Agreement Also Captures Dispute over Asset Purchase Agreement
In 2010, plaintiff James Palese (Palese) sold two companies to defendant Tanner Bolt & Nut, Inc. (Tanner), and Tanner hired Palese as the General Manager of its new Herman's Hardware Division, which included Palese's companies. Palese entered into a five-year Employment Agreement with a broad arbitration clause calling for arbitration of "all claims . . .in any way relating" to the Employment Agreement. At the same time, he entered into two Asset Purchase Agreements, which provided that disputes should be settled in "any court of competent jurisdiction" in Kings County, New York. The Employment Agreement and the Asset Purchase Agreement made refernence to one another and were part of what the court deemd "an integrated deal."
In March, 2012, Tanner terminated Palese and then stopped payment on promissory notes relating to the Asset Purchase Agreement. Palese filed charges of discrimination and retaliation with the EEOC and then brought suit in the Eastern District of New York. Tanner moved to compel arbitration and dismiss the suit. On December 5, 2013, the District Court granted Tanner's motion in Palese v. Tanner Bolt & Nut, Inc.
There is no question that if Palese's only claim were breach of his employment agreement, the claim would be subject to the arbitration clause. But what of his claim that Tanner also breached the Purchase Agreements. As the District Court noted
[T]he essence of Palese's allegation is that Tanner retaliated against him in two ways—first by firing him, and second, in "further retaliation," by stopping payment on the promissory notes—in response to a single cause: Palese's objections to his employer's "constant racist, illegal and discriminatory" workplace conduct.
So put, it seems clear that his claims relating to the Purchase Agreement relate to the Employment Agreement.
The District Court also rejected Palese's further contention that the forum selection clause in the Asset Purchase Agreements vitiates the arbitration clause. That argument was foreclosed by the Second Court's decision in Bank Julius Baer & Co., Ltd. v. Waxfield, Ltd., 424 F.3d 278, (2d Cir. 2005). As in that case, the forum selection clause in the Asset Purchase Agreements could be read as complementary rather than contraditory to the arbitration clause in Palese's Employment Agreement.
The court thus granted Tanner's motion to compel arbitration of all of plaintiff's claims.
Monday, December 9, 2013
Every once in a while, a student will send me a story about contracts, but when multiple students send me the same story, you know they must be desparate for a study break -- and that there is some rather comical contracts story in the news.
And so it is with this story about a woman who won a $50,000 judgment on her claim that her fiance had breached his promise to marry her. A Georgia appellate court upheld the judgment, which included an award of attorney's fees, on appeal. The court more or less treated the couple as married and upheld an award of roughly half the property acquired during the relationship, which was a house valued at $86,000. The couple had co-habited for ten years and had a child together. The woman had looked after the child, as well as one she had from a previous relationship.
The man had had sexual relationships with other women both before and after he led his live-in partner to believe that he would marry her and gave her a ring worth $10,000. For what it's worth, the woman also had other sexual relationships.
According to media reports, the defendant's argument on appeal was that his alleged promise arose in the context of a meretricious relationship and was therefore unenforceable. Moreover, he denied any intention to marry. He claims he never said "will you marry me" or words to that effect. He just gave her a ring.
The meretriciousness argument is rather confusing, as a defense to the claim that he broke a promise, since the promise was to cleanse the relationship of its meretriciousness. As the appellate court noted, according to FoxNews, “the object of the contract is not illegal or against public policy.” If we still live in a world in which courts think they can pass judgment on people's long-term relationships (and we seem to), then a court is likely to uphold an agreement that will "make an honest woman" of the plaintiff.
The award of damages is also confusing. the effect of the ruling seems to be to treat the couple as married even though they weren't. In effect, the court is recognizing a common law marriage where such marriages do not seem to be recognized. I suppose the court could do so as a mechanism of giving the woman her expectation for the broken promise. The California Supreme Court endorsed such an approach in Marvin v. Marvin, but other courts have rejected marriage by judicial decree where the legislature has expressed its disapproval of recognition of common law marriages.
Thursday, December 5, 2013
As we noted last week, on Monday, the U.S. Supreme Court heard arguments in the first investment arbitration case ever to be placed on the Court's docket. That transcript from oral argument can be found here.
Other links related to the case, BG Group PLC v. Republic of Argentina, can be found on SCOTUSblog.
Wednesday, December 4, 2013
For those who don't want to click on the links, here is our earlier summary of the facts of the case:
Plaintiff, Rabbi, S. Binyomin Ginsberg had been a member of Northwest's frequent flyer program, WorldPerks, since 1999. By 2005, he was such a macher, Northwest granted him Platinum Elite Status (oy, what nachas!). In 2008, Northwest revoked his membership. Ginsberg claims that Northwest took this action because he was a kvetch. . . .
The official reason provided for the termination was that Northwest had discretion "in its sole judgment," to cancel a member's account due to abuse of the program. Apparently, such judgment includes the ability terminate a membership if complaints persist after the "Enough with the complaining already!" warning. Ginsberg sued, asserting four causes of action, but Northwest moved for dismissal, arguing that the Airline Deregulation Act (ADA) preempted all of Ginsberg's claims.
According to the The New York Times' synopsis of oral argument, Justices Ginsburg and Sotomayor expressed concern that the airline's frequent flyer program was either an illusory contract or subject to the airline's "whim and caprice." Justice Breyer, however, seemed inclined to think that claims sounding in breach of contract are preempted by the federal Airline Deregulation Act of 1978, which was supposed to allow airlines to compete based on, among other things, price. Since frequent flyer programs are price discounts, Breyer suggested that such programs are governed by the Deregulation Act and cannot be subject to claims based on state laws aimed at regulating the airlines. However, in 1995, the Court exempted contracts claims from federal preemption in American Airlines v. Wolens.
The distinction between regulating airlines through state law and regulating airlines through breach of contract claims is a subtle one. It seems to turn on whether Rabbi Ginsberg's claim is construed as a breach of contract claim or a claim that the airline breached a duty of good faith and fair dealing. Paul Clement, arguing for the airline (on page 13 of the transcript) claimed that to permit a claim based on the duty of good faith and fear dealing would "enlarge the bargain." Since the contract gave the airline discretion to terminate Rabbi Ginsberg's membership, Clement argued, invoking the implied duty of good faith and fair dealing takes his claim outside of the contract. The claim implicates state policies because in some states the implied duty is not merely a rule of construction but a means of imposing public policy standards of "fairness and decency" on private agreements.
The Solicitor General joined the case as amicus curiae on behalf of the airline and attempted to clarify the federal uniformity concerns implicated in the case. Counsel for the Solicitor General contended that state contracts law is fine to help adjudicate the intent of the parties, but where states impose public policy concerns in areas such as implied covenants and the unconscionability defense, there preemption is necessary.
This is very strange territory, and it was clear that Justices and counsel alike struggled to work out how to put such fine distinctions into place. It is odd for the Court to say in Wolens that contracts claims are not preempted by the Deregulation Act but for the Court to now say that certain types of contracts claims, like breach of the implied covenant of good faith and fair dealing or unconscionability defenses are still preempted.
And what about Federal Arbitration Act (FAA) preemption? One of the few ways that parties can get out of arbitration clauses is by arguing that such clauses are unconscionable, because the FAA does not preempt defenses sounding in common law contracts doctrine. But since unconscionability doctrine varies from state to state, parties seeking to enforce arbitration clauses could argue that the same uniformity concerns that govern preemption in the Deregulation Act context should also apply in the FAA context. If so, good-bye unconscionability challenges to arbitration clauses.
The Times provides this link to the transcript of oral argument.
Friday, November 29, 2013
Craig Crockett's law firm had a billing dispute with LexisNexis (Lexis). but his firm's agreement with Lexis had an arbitration clause. Crockett realized that arbitration of his claim against Lexis as individual claim would be economically unfeasible, so he sougth to create a nationwide class of similarly situated Lexis customers. The arbitration clause itself was silent about the availability of class claims. In 5 Reed Elsevier, Inc. v. Crockett, the Sixth Circuit affirmed the District Court's finding that arbitration clause does not permit class claims.
Crockett's basic claims is that, although his firm was to be charged a monthly fee for unlimited use of certain Lexis databases, and an additional fee for the use of other databases, Lexis charged him for the use of databases that were not identified as extras. He seeks to bring claims for fraud, negligent misrepresentation, breach of contract, negligence, gross negligence, unjust enrichment, and violation of New York's consumer protection laws on behalf of classes consisting of law firms using Lexis services and their clients. On behalf of the two classes, Crockett sought damages in excess of $500 million.
Lexis responded to the claim with a suit in federal District Court seeking a declaration that the arbitration agreement did not allow for class arbitration. The District Court granted the declaratory judgment sought. Crockett objected that the issue of whether or not classwide arbitration was available should have been put to the arbiter. As the Sixth Circuit explained, that issue turns on whether it is a "gateway" or a "subsidiary" question. There is a presumption in favor of courts answering gateway questions, while subsidiary questions should presumptively be reserved to the arbiter.
Alas, the Supreme Court has yet to decisively address whether classwide arbitrability is a gateway or subsidiary question. While a plurality of the Justices found the issue to be susbidiary in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003), the Court more recently acknowledged that it had not yet determined whether or not classwide arbitrability is a gateway question. Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2 (2013). But in other recent cases, Stolt-Nielsen and Concepcion, the Supreme Court has characterized the difference between bilateral and class arbitration as "fundamental" and thus has indicated fairly strongly that the issue is a gateway question.
The Sixth Circuit cited various reasons for assigning "gateway" status to the question of classwide arbitration and concluded that "whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved 'for judicial determination unless the parties clearly and unmistakably provide otherwise'" (citing Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 (2002)). The Court then reasons that "the principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it." Because the consequences of class arbitration are "momentous," the Sixth Circuit reasoned, an arbitration agreement must include class arbitration in order for a court to find that the parties have agreed to it.
To which I say, where is the contra proferentem canon when a consumer needs it? The agreement is silent on the issue and thus unquestionably ambiguous. The consequences are equally momentous on both sides, since the Sixth Circuit acknowledges that Crockett's claims are not worth bringing as an individual arbitration. It also characterizes the contract as one of adhesion. So it was entirely within Lexis's powers to avoid the ambiguity and completely beyond Crockett's power to remedy it. In such cases, courts should invoke contra proferentem and interpret the agreement in favor of the non-drafting party.
Crockett also argued that the arbitration clause is unconscionable, and the Sixth Circuit seemed to agree that, substantively, it's a lousy agreement. However, elements of procedural unconscionability are lacking, and Crockett had the option of using Westlaw (which apparently has no arbitration clause -- for now). This is likely a correct application of the law but it also illuminates a central tension in unconscionability doctrine. In order to show that substantive unconscionability exists, one has to show that the terms are outrageously lopsided in favor of the drafting party "by the business standards and mores of the time and place." But if one can make such a showing, then one loses on the procedural unconscionability prong because one then could have chosen to go with a competing business. And if all of the businesses in the market have equally one-sided terms, then one cannot meet the standard for substantive unconscionability.
Tuesday, November 26, 2013
Monday, November 25, 2013
The U.S. Supreme Court is scheduled to hear oral arguments on December 2, 2013 in BG Group PLC v. Republic of Argentina. Links related to the case can be found on the SCOTUSblog, including this fabulous introduction to the case from Professor Diane Marie Amann (pictured), the Emily and Ernest Woodruff Chair in International Law at the University of Georgia School of Law. The issue in the case is whether, in disputes involving a multi-staged dispute resolution process, a court or the arbitrator determines whether a precondition to arbitration has been satisﬁed.
The International Dispute Resolution Committee of the DC Bar's International Law Section, in cosponsorship with the American Society of Internatioanl Law's Howard M. Holtzmann Research Center for the Study of International Arbitration and Conciliation and the Washington Foreign Law Society, and in cooperation with the International Arbitration Committee of the American Bar Association's Section of International Law and the International Committee of the American Bar Association's Section of Dispute Resolution, will host a luncheon program to discuss the case immediately following the oral argument.
- George Bermann, Professor, Columbia Law School, and Chief Reporter for the forthcoming Restatement on International Commercial Arbitration
- Janis Brennan, Partner, Foley Hoag LLP, and Vice-Chair, DC Bar International Dispute Resolution Committee
- Jean Kalicki, Partner, Arnold & Porter LLP (Moderator)
Wednesday, November 20, 2013
Laura Dee (plaintiff) and Dena Rakower (defendant) lived together in a committed, same-sex relationship for nearly 18 years and are the parents of two children. In her complaint, Dee alleges that they had an oral “joint venture/partnership agreement” whereby Dee would share in Rakower's assets, including Rakower’s retirement contributions and earnings, in exchange for Dee leaving her full-time job to care for their children. The couple’s entire relationship pre-dated the passage of New York’s Marriage Equality Act. Upon termination of the couple’s relationship, Dee sued Rakower for, among other claims, breach of contract. The trial court dismissed the cause of action for breach of contract; in a divided opinion, the Appellate Division (Second Department) reinstated that claim.
The majority of the appellate court reasoned that the allegations in the complaint sufficiently plead a cause of action for breach of contract:
The alleged contractual agreement between the parties was supported by consideration. "Consideration consists of either a benefit to the promisor or a detriment to the promisee. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him [or her]" * * * The consideration here for the alleged contract is the forbearance of the [Dee’s] career, the inability to continue to save toward her retirement during that forbearance, and her maintenance of the household in return for a share in [Rakower’s] retirement benefits and other assets earned during the period of forbearance. * * * Since [Dee] also alleged that [Rakower] breached the alleged agreement and that she has sustained damages as a result of that breach, at this pleading stage, the eighth cause of action [to recover damages for breach of contract] must survive dismissal * * *.
The fact that the alleged agreement was made by an unmarried couple living together does not render it unenforceable. "New York courts have long accepted the concept that an express agreement between unmarried persons living together is as enforceable as though they were not living together, provided only that illicit sexual relations were not part of the consideration of the contract'" (Morone v Morone, 50 NY2d 481, 486, quoting Rhodes v Stone, 63 Hun 624, 624 [citations omitted]). "[W]hile cohabitation without marriage does not give rise to the property and financial rights which normally attend the marital relation, neither does cohabitation disable the parties from making an agreement within the normal rules of contract law" (Morone v Morone, 50 NY2d at 486; see Matter of Gorden, 8 NY2d 71, 75).
The case at bar is similar to Morone v Morone (50 NY2d 481). In Morone, the parties cohabited as husband and wife although they were not married. The plaintiff claimed that the parties had entered into an oral partnership agreement whereby, among other things, they agreed that the net profits of their partnership would be used and applied for their equal benefit **. The plaintiff devoted herself exclusively to their relationship and this endeavor. The Court of Appeals concluded that the plaintiff sufficiently stated a breach of contract cause of action.
There is no reason, on this record, at this early stage of the litigation to conclude, as the Supreme Court did, that the oral agreement between the parties cannot serve as the basis for a breach of contract cause of action. ***
Contrary to the Supreme Court's determination and the opinion of our dissenting colleague, [Dee’s] failure to specifically allege that there was a "meeting of the minds" as to how the assets would be distributed upon the termination of the parties' relationship does not compel the conclusion that the complaint fails to state a cause of action to recover damages for breach of contract. * * * The complaint specifically alleges that the parties agreed to share equally the defendant's retirement account accrued during that period of time that the plaintiff did not work at a job that provided a retirement plan without consideration of the direct and indirect contributions of the parties or when such contributions were made. Thus, as alleged, there is sufficient definiteness to the material terms of the alleged agreement between the parties to establish an enforceable contract (see Joseph Martin, Jr., Delicatessen v Schumacher, 52 NY2d 105, 109). The failure to include the mechanism for the implementation of the parties' alleged agreement does not negate the allegations in the complaint that they entered into an agreement with regard to the rights to their assets.
The dissent, however, took the view of the oral agreement, stating that “the complaint is devoid of any allegation as to whether and how their assets and pension benefits would be divided in the event the parties were to no longer be together.” The dissent opined that “read[ing] such a provision into the parties’ agreement, where none is expressed in the complaint, would result in the invention of an implied contractual provisions which, as noted, is prohibited by our law for agreements between unmarried persons living together.” Then the dissent expressed concern that Dee seeks “equitable distribution” without alleging that the parties had expressly agreed to such a distribution:
Distilled to its essence, the plaintiff in this action seeks "equitable distribution" of the defendant's assets and future pension benefits without alleging in the complaint that the defendant had promised to share them if the parties did not stay together. Indeed, there is no allegation that the parties had any meeting of the minds as to the distribution of property or assets upon a termination of their relationship. Absent such an allegation, and absent an affidavit from the plaintiff clarifying or expanding her description of the parties' agreement to cover such an eventuality, the complaint fails to state a cause of action. The plaintiff's theory of recovery is dependent upon implying terms for the distribution of retirement benefits to circumstances involving the dissolution of the parties' familial relationship. The Supreme Court properly refrained from implying such provisions into the oral contract in determining that, under the circumstances alleged, the "complaint lacks a contract for the court to enforce."
No aspect of this partial dissent speaks to the merits of the New York's more recent enactment of the Marriage Equality Act. This Court is sensitive to the complications occasioned by various forms of familial relationships that necessarily result in financial agreements or entanglements. The judiciary, however, is limited in addressing and determining the ownership and/or distribution of familial assets, absent either the existence of a lawfully recognized marriage or an enforceable expressed contract between persons in a cohabitational relationship.
According to an article in the NYLJ about the case:
The court agreed to resolve the appeal though the parties settled, apparently accepting the position of Dee's pro bono attorney, Michele Kahn of Kahn & Goldberg, that the case involved important issues for both gay and heterosexual couples.
Kahn noted in a letter to the court that there were "tens of thousands of unmarried, mostly gay, couples in the State." Although those couples can now marry, she said "questions will remain" about the application of equitable distribution laws to "specific and identifiable promises and agreements" prior to their marriages.
Kahn also argued that, according to the Census Bureau,"an increasing number of couples are rejecting the institution of marriage."
"The manner in which this couple conducted their lives—relying and acting upon each others' specific promises, without formal writings, is the way that most unmarried couples live their lives," she wrote. "Inevitably, many of these couples will break up, and inevitably many of these couples will be involved in litigation over property and assets that were acquired during the relationship," Kahn wrote.
Dee v. Rakower, 2013 NY Slip Op 07443 (2d Dep't Nov. 13, 2013).
[Meredith R. Miller]
Friday, November 15, 2013
On November 2, 2013, Judge Dearie of the U.S. District Court for the Eastern District of New York denied British Airways' motion to dismiss a putative class action suit in Dover v. British Airways, PLC. Plaintiffs, British Airways Executive Members, allege that British Airway was charging fuel charges on rewards flights that were not actually based on the cost of fuel. British Airways moved to dismiss based on federal preemption and based on the claim that plaintiffs could not show that the surcharge was not based on fuel costs.
The terms and conditions of the Executive Membership agreement provide as follows:
Members will be liable for all taxes and other charges associated with Reward travel on British Airways or a Service Partner airline, including without limitation, airport departure tax, customs fines, immigration fees, airport charges, customer user fees, fuel surcharges, agricultural inspection fees, security and insurance surcharge or other incidental fees or taxes charged by any person or relevant authority or body.
Despite British Airways' claim on its website that fuel surcharges "reflect the fluctuating price of worldwide oil," plaintiffs allege that the fuel surcharges are just an excuse for British Airways to increase revenue by charging passengers hundreds of dollars on free flights. For example, one plaintiff paid $854 for two "free" round-trip tickets between San Francisco and London. Another plaintiff paid nearly $3300 in fees, including fuel surcharges, for five tickets from Los Angeles to London. Plaintiffs put in evidence suggesting that the fuel surcharges are a hedging mechanism that bear little relationship to the actual cost of fuel. The District Court found these allegations sufficient to surive a motion to dismiss.
British Airways also argued that dismissal was warranted because plainiffs' claims are preempted by the Federal Airline Deregulation Act (ADA), which forbids states from "enact[ing] or enforc[ing] a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier[.]" 49 U.S.C. § 41713(b)(l). The District Court found this argument foreclosed by Am. Airlines, Inc. v. Wolens, 513 U.S. 219, 222 (1995), in which the U.S. Supreme Court ruled that "the ADA does not preempt contract claims, whether or not they relate to pricing or would otherwise be precluded if articulated under state consumer protection laws."
The District Court also rejected British Airways' argument that plaintiffs claims are preempted because enhanced or enlarged by state laws or policies external to the agreement. The District Court found that plaintiffs, like those in Wolens, were merely seeking to enforce the terms of their agreement with the airline. Finally, the District Court rejected an implied preemption based on the ADA's occuption of the field on the ground that the U.S. Supreme Court had declined to recognize any such preemption.
Tuesday, November 12, 2013
The same panel that declined to compel arbitration in the Chavarria case, which we disussed yesterday, did compel arbitration against claims brought by a putative class of students against the parent company that owns the for-profits colleges they attended in Ferguson v. Corinthian Colleges, Inc. Plaintiffs brought claims alleging deceptive business practices. Defendant moved to compel arbitration, and the District Court granted that motion in part, allowing plaintiffs' claims for injunctive relief under California’s unfair competition law, false advertising law, and Consumer Legal Remedies Act to proceed. The District Court's decision to allow such claims to proceed relied on the California Supreme Court's Broughton-Cruz rule, which exempts claims for public injuntive relief from arbitration. But U.S. Supreme Court precedent has now established that the Federal Arbitration Act (FAA) preempts the Broughton-Cruz rule. Accordingly, the Ninth Circuit reversed the District Court in part and granted Corinthian Colleges motion to compel arbitration.
The Ninth Circuit summarized plaintiffs' claims as follows:
The thrust of Plaintiffs’ complaints was that Corinthian systematically misled prospective students in order to entice enrollment. Corinthian allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.
Plaintiffs brought various claims seeking damages and injunctive relief under California law.
The Ninth Circuit summarized the recent history of U.S. Supreme Court cases in which it held that the FAA preempts various state rules. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). it held that the FAA preempted a California rule—known as the Discover Bank rule—which invalidated most class action waivers in adhesion contracts, including arbitration agreements, as unconscionable. In Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam), the Supreme Court reiterated its position that "[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA."
The Ninth Circuit found that rule articulated in Concepcion and Marmet invalidated the Brouthton/Cruz rule. After reviewing Supreme Court rulings on the scope of the FAA, the Ninth Circuit concludes that "even where a specific remedy has implications for the public at large, it must be arbitrated under the FAA if the parties have agreed to arbitrate it."
The Ninth Circuit also rejected plaintiffs' argument that their claims were not within the scope of the arbitration agreement.
Monday, November 11, 2013
In Chavarria v. Ralphs Grocery Company, the Ninth Circuit found an arbitration agreement unconscionable and therefore affirmed the District Court's order denying Ralphs' motion to compel arbitration and remanded the class action case back to the District Court for further proceedings. In so doing, it rejected Ralphs' contentions that its arbitration clause was not unconscionable and that California's law on unconscionability is preempted by the Federal Arbitration Act (FAA).
Plaintiff worked at Ralphs for six months as a deli clerk. Plaintiff's employment application included an agreement to be bound by Ralphs' aribtration policy. The policy provided for arbitration by a retired state or federal judge to be agreed upon by the parties or selected through a process of elimination -- that is, each party would get to strike one of the other party's three proposed aribtrators until only one name was left, and that person would be the arbitrator. The process guarantees that the arbitrator chosen would be one of the three proposed by the party that did not seek arbitration. The Ninth Circuit described the arbitration agreement's promvision for allocation of costs of as arbitration "a little convoluted," but the basic default is that the parties split the costs of arbitration.
The District Court identified several aspects of Ralphs' arbitration policy that, taken cumulatively, rendered it procedurally unconscionable. The policy was offered to Chavarria on a "take it or leave it" basis, and the specifics of the policy were not shared with Chavarria until three weeks after she agreed to be bound by it. Quoting an earlier decision, the Ninth Circuit noted that “a contract is procedurally unconscionable under California law if it is ‘a standardized contract, drafted by the party of superior bargaining strength, that relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’” That standard was clearly met in this case (and in almost all other cases involving form contracts), and the problem was exacerbated here because, while Chavarria recieved a one-paragraph notice of the arbitration policy, it actual terms, which were in a complex, four-page document, were provided later.
As to substantive unconscionability, the Ninth Circuit agreed with the District Court's finding that substantive unconscionability is satisfied here because the arbitration policy shocks the conscience. It does so because the arbitrator selection process is designed so that Ralphs will always choose the arbitrator in a claim brought by an employee. Moreover, the allocation of arbitrator's fees is unfair, imposing costs on employees and precluding them from recovering those costs so as to render many claims "impracticable." The fees for a "qualified arbitrator" as defined in the policy would range form $7000 to $14,000 per day, so an employee seeking to arbitrate would likely have to pay at least $3500, a cost that would likely exceed any claim that people like Chavarria might bring.
[An aside: Ralphs argued that in a case such as this one, plaintiff would get to choose the arbitrator. Since Chavarria tried to sue in court and Ralphs moved to compel arbitration, Ralphs was the party seeking arbitration. The Ninth Circuit found this unpersuasive because inconsistent with the wording of the arbitration policy and because it requires employees to bring a frivolous lawsuit in order to force Ralphs to compel arbitration. Even if the Court is right about the language of the arbitration policy, wouldn't Ralphs be estopped from insisting on its right to choose an aribtrator by having argued against such a right in this case? And given that there is no bar to plaintiff proceeding in arbitration as part of a class, won't the cost of arbitration be allocated to the class? So, the arbitrator's fee is only excessive in relation to the claim if the claims of the class in the aggregate do not exceed the arbitrator's fee.]
The Ninth Circuit begins its analysis of the preemption issue with a summary of Concepcion, 131 S. Ct. 1740 (2011):
Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability. Id. at 1746. A defense such as unconscionability, however, cannot justify invalidating an arbitration agreement if the defense applies “only to arbitration or [derives its] meaning from the fact that an agreement to arbitrate is at issue.” Id. The U.S. Supreme Court has held that state rules disproportionately impacting arbitration, though generally applicable to contracts of all types, are nonetheless preempted by the FAA when the rule stands as an obstacle to the accomplishment of Congress’s objectives in enacting the FAA. Id. at 1748.
Returning to the preemption argument, the Ninth Circuit noted that Concepcion had held that "the FAA preempts state laws that in theory apply to contracts generally but in practice impact arbitration agreements disproportionately." But since California's procedural unconscionability doctrine applies to all contracts, it does not disproportionately affect arbitration agreements.
As to substantive unconscionability, the Ninth Circuit noted a potential difficulty arising from the Supreme Court's recent decision in American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). That case involved an argument that a class-action waiver in an arbitration agreement precluded plaintiffs from pursing their antitrust claims because the costs of proving such claims would exceed the value of any particular claim. This Ninth Circuit found this case distinguishable:
The class waiver provision did not foreclose effective vindication of that right, the Court reasoned, because “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute an elimination of the right to pursue that remedy.” Id. at 2311. The Court explicitly noted that the result might be different if an arbitration provision required a plaintiff to pay “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at 2310–11.
The Ninth Circuit found that this case presents the exact situation excluded from the scope of the Italian Colors precedent. The costs of arbitration alone, the Court found, "effectively foreclose pursuit of the claim." The Court then explained more fully its concerns about Ralphs' arbitration policy:
In addition to the problematic cost provision, Ralphs’ arbitration policy contains a provision that unilaterally assigns one party (almost always Ralphs, in our view, as explained above) the power to select the arbitrator whenever an employee brings a claim. Of course, any state law that invalidated this provision would have a disproportionate impact on arbitration because the term is arbitration specific. But viewed another way, invalidation of this term is agnostic towards arbitration. It does not disfavor arbitration; it provides that the arbitration process must be fair.
If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees. Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power. California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power. The FAA does not preempt its invalidation of Ralphs’ arbitration policy.
[Another aside: At first, reading through this opinion, I thought this might be an attempt by liberal judges on the Ninth Circuit to find ways to undermine the Supreme Court's 5-4 majorities' clear indications of support for the enforcement of arbitration agreements. But the three-judge panel consisted of two George W. Bush appointees and a Republican appointed late in the Clinton Presidency. Either this is not a case on which liberal and conservative judges would differ or the Supreme Court is out of step with the views of the judges on lower courts.
I have my doubts about the Court's procedural unconscionability analysis, and that analysis colors the substantive unconscaionability analysis. It would of course be unconscionable if Ralphs could appoint its own president as the arbitrator. But this arbitration agreement is facially neutral and would never result in Ralphs getting its preferred arbitrator. At best, it gets its third choice (assuming plaintiffs can accurately identify Ralphs' preferences). In any case, that choice will be a retired judge, so the Ninth Circuit's assumption that such a person would be incapable of impartiality is a bit insulting to retired judges. This case seems like a long-shot for Supreme Court review, but it would be nice if the Court could clarify whether this case does indeed present facts that evade the Italian Colors precedent.]
Thursday, November 7, 2013
In Tillman v. Macy's, Inc., the Sixth Circuit reversed a District Court's denial of Macy's motion to compel arbitration. The issue in the case was whether Tillman had consented to Macy's four-step dispute resolution program by continuing to work at Macy's and not availing herself of two opportunities to opt out of the program.
Tillman had been employed since 2001 by May Department Stores, which merged into what is now Macy's, Inc. in 2005. The new dispute resolution program was rolled out in 2006, and at that time, employees were notified of their ability to opt out of the program and that if they did not choose to opt out they would not be permitted to bring claims against Macy's in court. There followed another opportunity to opt out in 2007. Macy's claims that Tillman received notice of her right to opt out of the dispute resolution program on at least two occassions. The District Court found that Tillman had no duty to read the materials sent to her, and it found it unsurprising that she did not read the information about the dispute resolution program carefully, since the company was sending employees a lot of information at the time of the merger. Tillman never signed any agreement or knowingly waived her right to a trial, and so the District Court refused to compel arbitration.
The Sixth Circuit disagreed. It found that Macy's various information sessions and mailings constituted an offer to Tillman that she accepted by continuing to work for Macy's and not opting out of the dispute resolution program.
In finding a waiver of prospective civil rights claims, courts consider five factors:
(1) plaintiff’s experience, background, and education; (2) the amount oftime the plaintiff had to consider whether to sign the waiver, including whether the employee had the opportunity to consult with a lawyer; (3) the clarity of the waiver; (4) consideration for the waiver; as well as (5) the totality of the circumstances.
The Sixth Circuit concluded that, applying these five factors, Ms. Tillman waived her right to bring a claim in court. A fine test that one! If you are considering the totality of the circumstances, why even mention the other four?
Wednesday, November 6, 2013
Over at The New York Law Journal, Joel Stashenko reports on Wu v. Xu, a case decided last month in the Rockland County Supreme Court. The case involves an alleged promise by Mr. Wu to pay Ms. Xu $500,000. The parties had a "relationship," about which the court refused to say much more except that Ms. Xu alleged that Mr. Wu had promised to divorce his wife and marry her. The alleged promise was to serve two purposes. Apparently, Mr. Wu felt bad about having hurt Ms. Xu in breaking off their friendship, and he wanted to make it up to her with the payments. He also wanted to secure her silence about their relationship.
Mr. Wu made payments in excess of $47,000, but when Ms. Xu's attorney sent a demand letter insisting on the enforceability of the promise to pay $500,000, Mr. Wu decided to seek a declaration that the promise was unenforceable as without consideration and in breach of public policy.
The Court begins its analysis by quoting Platt v. Elias, a 1906 case, which stated:
[t]hat which one promises to give for an illegal or immoral consideration he cannot be compelled to give; and that which he has given on such consideration he cannot recover. The law will not afford relief to either party,in pari causa turpitudinis; but leaves them just where they have placed themselves.
According to the Court, the application of this rule means that Mr. Wu cannot recover the money already paid, and Ms. Xu cannot enforce her alleged right to further payments.
All well and good if this is an illegal contract, but is it? The Court says that the alleged agreement violates public policy because it falls within the category of contracts that "tend to impair familial relationships." The Court then quotes the Restatement Second to the effect that "[a] promise that tends to encourage divorce or separation is unenforceable on grounds of public policy," and concludes:
Although the August 2012 letter is not an express agreement to marry or to encourage a divorce, it does involve the institution of marriage and the well-being of the familial relationship of Plaintiff and his wife to the extent that this Court finds is against public policy. As such, the Court finds that the letter is not a valid, enforceable contract.
So ends the discussion of the contract claim.
The Court then proceeds to the discussion of whether an award of attorneys' fees is appropriate. They are appropriate, the Court finds, because the legal claim was without merit and because it is extortionate to threaten to sue somebody based on a legal claim that is without merit. Q.E.D. The Court then approves a $2500 sanction of Defendant's counsel for frivolous conduct.
ADDENDUM: I have striven for even-handedness in the post above, but the more I think about it, the more outrageous I find the court's opinion. I do not think the promise is enforceable, because I think it is gratuitous, but there is an argument that consideration was given in the form of the defendant's silence. As a result, I do not think the demand letter was frivolous. What I do find frivolous is quoting 100 year old cases and the 30-year-old restatement on the sanctity of the institution of marriage when our public policy relating to marriage is in a state of violent flux. Moreover, the quotations are not on point, because the demand letter was not about impairing familial relationships; it was about enforcing a promise. Plaintiff had already done plenty of impairing on his own.
The Court's reasoning runs as follows:
1. The contract is unenforceable based on public policy and thus the demand letter was frivolous.
2. It is an act of extortion to threaten legal action based on a frivolous claim.
For the reasons given above, I think the demand letter was incorrect on the law but not frivolous. This is especially so because a court's refusal to enforce a contract based on something as elusive as public policy is always fraught. That being the case, the threatened legal action is very far from extortion. Defendant did not propose the arrangement. She did not threaten to blab about the parties' relationship unless the Plaintiff paid. The Plaintiff offered to pay and did pay two installments. The award of attorneys' fees and the imposition of sanctions does not seem justified based on the law as laid out in the opinion. There may be other sources of New York state law that relevant here, but the Supreme Court's opinion is not convincing.