ContractsProf Blog

Walmart Wins Right to Terminate Its Credit Card Deal with Capital One

Since 2018, Capital One has been the exclusive provider of credit cards for Walmart. The parties' agreement specified that Walmart could terminate their agreement if Capital One failed to meet certain customer service benchmarks. Walmart now claims that Capital One has not in fact met those benchmarks and desires to terminate the relationship. Capital One offers a different interpretation of the parties' agreement and claims that Walmart is not entitled to terminate. The parties made opposing motions for partial summary judgment seeking declaratory judgment.

In Walmart, Inc. v. Capital One, National Ass'n, the District Court for the Southern District of New York sided with Walmart. There is significant redaction in the case, but it seems that the case turns on one provision of the agreement, which provides that Walmart's right to terminate is triggered if Capital One fails to meet a critical "Service Level Agreement" (SLA) five times within a twelve-month period. Capital One had missed a total of five “Critical” SLAs in 2022, and Walmart sought to terminate the agreement in February 2023. 

Capital One thought the termination unjustified. It's understanding was that Walmart's termination right was triggered only if it failed to meet the same critical SLA in a twelve-month period. In this case, two different critical SLA's were at issue, and Capital One had not failed to meet either of them five times. The court, finding the contract unambiguous, rejected this reading, noting, "the Court begins from the unremarkable premise that the article 'a,' when used prior to a countable noun, is most often understood to refer to a nonspecific thing." In this case, the contract references a critical SLA, and thus any failure to meet a critical SLA will do.

Although the opinion is 41-pages long, there's not much to add. The court goes through its paces, consulting dictionaries and distinguishing cases, but it never strays very far from the common-sense proposition with which it started. The court denied Capital One's motion for partial summary judgment and granted Walmart's, issuing a declaration that Walmart was legally entitled and legally did terminate the agreement between the parties.

Eleventh Circuit Upholds NLRB Decision Requiring Corporation to Hire Union Workers

TK Global (TK) was hired to provide pipefitting services in connection with the construction of a manufacturing facility in Commerce, Georgia.  In March, 2020, a representative from the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada, AFL-CIO (the Union) approached TK to ask if the company needed more workers for the job.  The initial answer was no, because the company had brought in its own work crews form Korea, but later in the project the company needed more workers.  

A Union representative offered to provide workers in exchange for the company's agreement to be bound by a collective bargaining agreement (CBA).  Among other things, the CBA provided that TK had the right to reject or terminate Union workers, but only with notice to the Union.  The CBA was a 62-page document, and TK's principal expressed some discomfort, but he signed it and returned it to the Union representative.  From there, the facts get complicated, but to sum it all up: TK hired some Union workers, terminated them due to language barriers between them and the Korean workers, and later hired some more Union workers.  The Union workers were compensated as provided for in the CBA.  

Troubles arose when TK hired a subcontractor to complete the job.  The Union then reminded TK that it had agreed to only hire through the Union.  TK claimed it had never agreed to any such thing.  The sub-contractor then advised TK to simply withdraw from or terminate the CBA and drafted the termination letter.  It did so and terminated all of the Union workers still on the site.

At that point the National Labor Relations Board (NLRB) got involved, charging TK with violations of the National Labor Relations Act (NLRA), specifically of 29 U.S.C. § 158(a)(1), (3), (5).  An Administrative Law Judge (ALJ) concluded that TK had violated the NLRA by terminating the CBA, either because it was bound by having signed the CBA or by its conduct. Second, TK violated the NLRA by firing the workers on a discriminatory basis and without consultation with the Union.  Third, TK's firing of the workers and refusing to rehire them violated the NLRA by conduct "inherently destructive of workers' rights" and by exhibiting an anti-union animus.  A panel of the NLRB affirmed the ALJ's conclusions.

In TK Global, LLC v. Nat'l Lab. Rels. Bd., the Eleventh Circuit found that the  NLRB's ruling was supported by substantial evidence, and it thus affirmed the NLRB's decision.  The court first found that there was a binding agreement between the parties.  TK argued that it had never agreed to hire Union employees exclusively.  The facts could be viewed to support such a conclusion, but there was also substantial evidence going the other way, and that sufficed to satisfy the operative standard of review. 

Much of TK's argument hinges on their principals' poor English language skills and allegations of "cultural differences."  Courts routinely enforce contracts against ordinary employees and consumers who do not have the English language abilities or knowledge of the culture surrounding contracts of adhesion in the United States. I can't imagine why a court would take these arguments seriously in the context of a sophisticated business engaged in a large construction project.  If its principals lack language skills, the corporation clearly has the means to hire attorneys who can explain the terms to them.  Nonetheless, the court treats these arguments as colorable, just not enough to overcome the substantial support for  arguments on the other side.

Guest Post: Tal Kastner on Coinbase, Inc. v. Suski

Contract Conflict in Coinbase
Tal Kastner, Rutgers Law School

This past spring, Coinbase, Inc. v Suski, prompted little notice amidst the headline-making Supreme Court cases at the end of the term. Coinbase involved two contracts between the cryptocurrency exchange platform and platform users. The first, a User Agreement, contained an arbitration provision specifically delegating disputes relating to arbitrability to an arbitrator “and not [to]… a court or judge.”  The second agreement, establishing the official rules to a sweepstakes for a chance to win Dogecoin, contained a forum selection provision granting California courts “sole jurisdiction over any controversies regarding” the sweepstakes. When Coinbase users brought a class action suit claiming that the sweepstakes violated several California consumer protection laws, the conflict between the agreements became evident.

A district court in California held that the sweepstakes agreement superseded the user agreement, and the Ninth Circuit Court of Appeals affirmed. In an eight-page opinion penned by Justice Ketanji Brown Jackson, the Supreme Court affirmed the Ninth Circuit’s ruling, holding that, when multiple agreements conflict on the question of who decides arbitrability, it is for a court to determine who decides.

Pointing to “[b]asic legal principles,” Justice Jackson’s opinion stresses the paradigm of arbitration as a “matter of contract and consent.”  In doing so, it emphasizes that “traditional contract principles” of consent apply to questions of the merits of arbitration disputes, of whether parties agreed to arbitrate, and of who decides arbitrability—what Justice Jackson termed the first-, second-, and third- order disputes, respectively. And, as such, the opinion explains, the same principles extend to the fourth-order question of “[w]hat happens if parties have multiple agreements that conflict as to the third-order question of who decides arbitrability.”

The characterization of arbitration disputes in Coinbase reads as, perhaps unusually, straightforwardly coherent as a matter of contract law. Prior cases involving contracts of adhesion with arbitration provisions, such as Lamps Plus, Inc. v. Varela, contorted the notion of consent to counter-intuitive ends.  In that case, the Court construed an ambiguous employment agreement in favor of the drafter to hold that a company had not explicitly consented to class-wide arbitration in the arbitration agreement it imposed on its employees. In contrast, Justice Jackson’s opinion for the Court preserves a space for judicial review of what parties agreed to by contract. 

Coinbase is also notable for addressing the issue of the uncertainty caused by the potential interaction among contracts. As I’ve analyzed, the potential for one contract to create ambiguity for other contracts has been an underappreciated risk for contract drafters, especially in sophisticated transactions involving multiple parties using different contracts to allocate risk and responsibility among various actors with respect to different aspects of a complex deal. Many courts have yet to articulate clear rules on how they evaluate the relationship between contracts that might relate to the same parties—a question that might be most salient in innovative complex transaction structures.  

Yet, lest the lesson of Coinbase’s contract drafting mistake get lost on the drafters of contracts of adhesion who seek to insulate themselves from judgment, Justice Gorsuch’s concurrence, which insists that the Court does not endorse the Ninth Circuit’s reasoning, puts a fine point on it.  In fact, Justice Gorsuch goes so far as to contemplate a provision to be included in “a master contract,” which he suggests, could be used in such circumstances. The provision would state that all disputes “related to this or future agreements between the parties, including questions concerning whether a dispute should be routed to arbitration, shall be decided by an arbitrator.”  While this is an apt lesson for parties involved in sophisticated transactions (and, in fact, one I discuss in my article), the implications of this lesson, should courts ultimately accept that such a provision can bind parties’ future agreements in the context of contracts of adhesion, are troubling as a matter of contract and consent.

Indeed, given the difficulty courts face in policing the boundaries between doctrine designed for sophisticated parties on one hand, and for consumer contracts on the other (as Ethan Leib and I have discussed), Justice Gorsuch’s invitation to import a practice from complex transactions involving sophisticated parties into the context of consumer contracts further threatens whatever boundaries remain in the doctrine—and whatever protections remain for consumers from companies’ ability to strip them of rights through fine print. Most basically, Justice Gorsuch’s approach would further expand the scope of the arbitration clauses imposed on consumers by corporate entities. And, as Disney’s recent ugly attempt at arbitration-clause bootstrapping and similar cases suggest, companies are likely to continue to try to pursue this goal.

Bright Data Wins Summary Judgment on Claims that It Scraped Data from Meta

This case makes a lot more sense not that I have read and commented on Woodrow Hartzog and Daniel Solove's smash SSRN download hit, The Great Scrape: The Clash Between Scraping and Privacy.  Meta Platforms, Inc. (Meta) sued Bright Data, Ltd (Bright Data) alleging that it scraped data from Facebook and Instagram (the Sites) and then sold that data to its customers while also developing tools to allow others to engage in similar scape-shenanigans without detection. Meta alleged that this conduct violated the Sites' terms and policies and it sought damages and injunctive relief.  Bright Data responded that it scraped only publicly available information and that the Sites' terms and policies do not apply, as it canceled its Meta accounts.

Bright Data concedes that between April 2021 and early December 2022, it had accounts on the Sites. In late November, Meta conducted a video conference and warned Bright Data that it was in breach of the Sites' terms. Bright Data had two responses: first, it terminated its accounts; second it claimed that its scraping activities were unrelated to those accounts.

In January, in Meta Platforms, Inc. v. Bright Data, Ltd., the District Court for the Northern District of California ruled on Meta's motion for partial summary judgment as to liability and on Bright Data's motion for summary judgment.  The court first denied Meta's motion for summary judgment on the ground that Meta had not provided any evidence to support its claim that Bright Data had accessed non-public information on the Sites. Instead, Meta only alleged that Bright Data sold data containing 615 million records for $860,000, but that that data may well have been scraped from public records.

Here's were it gets messy.  Meta alleged that Bright Data used automation to beat technology to circumvent Meta's access restrictions.  I have long thought that a robot will be much more skilled than I am in passing a CAPTCHA test.  It turns out I was right, as was Stevie Martin.

The court, citing a case relying on Orin Kerr, then chides, "But Meta surely understands the difference between defeating anti-automated scraping and piercing privacy walls."  Professor Kerr argues, persuasively we are told, that using a bot to evade CAPTCHA is not "unauthorized access" to a website, as CAPTCHA is meant to slow access rather than a way to deny access.  Shame on you, Meta! Obviously, using a bot to gain access to a website guarded by a device that is meant to exclude bots from the website is not unauthorized access.  Sheesh.

Meta's other evidence that Bright Data scraped non-public data is that it advertises a tool, "Scraping Browser" that is compatible with  "Puppeteer" which is “capable of automating into a website as well as simulating many other user actions, which would allow automated collection of information available only to users logged into Facebook or Instagram accounts.”  Still, while Meta showed that Bright Data was capable of doing so, it has not shown that Bright Data did so.

Finally, the rest of the opinion on Meta's motion is devoted to a discussion of whether Bright Data violated a contractual agreement with Meta. In short, Meta argues that Bright Data violated its contract by engaging in data scraping whether it did so while logged onto its accounts on the Sites or while logged off. Bright Data insists that all of its scraping was done while logged off and thus did not violate Mata's terms and policies.

The court agreed with Bright Data.  The terms and policies only cover "use" of the Sites, and while Bright Data was not logged on to the Sites it was not using them.  The fact that Bright Data had accounts on the Site while it scraped is irrelevant because it scraped while logged off. Although the court acknowledged that both sides advanced reasonable arguments, it concluded that Meta's terms do not prohibit the scraping of publicly-available information from its Sites while logged off.  Facebook's "survival clause," providing that its terms and policies continue to apply, as relevant, after one terminates one's account, does not change matters.  If scraping public information while logged off was permissible when you have an account, it can't become impermissible after your delete your account.

The court thus denied Meta's motion for summary judgment as to liability and granted Bright Data's motion for summary judgment on Meta's breach of contract claim.  Meta was given leave to amend its complaint. Meta chose not to do so. Bright Data dropped its tortious interference claim now that Meta could not longer interfere with its scraping business.

Securities Law Suit Against Winkelvoss NFT Entities Sent to Arbitration

cellanr, CC BY-SA 2.0 via Wikimedia Commons

In early 2021, John Hastings bought non-fungible tokens (NFTs), digital assets, in this case in the form of digital art works called "Nifties," from an entity called Nifty Gateway, LLC (Nifty). Nifty is owned by the Winkelvoss twins (right). In December 2022, apparently disappointed in the Nifties as investment vehicles, Mr. Hastings sought to bring a class action complaint against Nifty for violations of the 1933 Securities Act, deceptive practices under New York law, and unjust enrichment.  Nifty moved to compel arbitration.

In Hastings v. Nifty Gateway, LLC, the District Court for the Southern District of New York granted Nifty's motion to compel arbitration. As usual, the question is whether a reasonable user would be put on notice that by creating an account with Nifty they were agreeing to Nifty's terms and conditions. The court provides an image of Nifty's sign-in page (reproduced below). As you can see, the page provides notice that by signing up for a Nifty account one is agreeing to Nifty's terms and conditions, and the page then provides a hyperlink to those terms and conditions. Those terms and conditions included, you guessed it, an arbitration provision.

The court found that Mr. Hastings had reasonable notice of Nifty's terms and that he had unambiguously assented to those terms when he created not one by three Nifty accounts. In addition, because the arbitration clause unambiguously delegated to the arbiter the authority to determine the scope of the arbitration clause, the court must allow the arbiter to decide whether Mr. Hastings' claims fall within the scope of the arbitration agreement.

Finally, Mr. Hastings argues that Congress, in passing the Private Securities Litigation Reform Act (the “PSLRA”) supersedes the Federal Arbitration Act (FAA) by guaranteeing that plaintiffs can pursue their securities claim in federal court, including by class action. This argument is foreclosed by many decisions finding that, absent some express statement indicating Congressional intent to override the FAA, courts should not "conjure conflicts" between it and other statutes. Although the court makes no mention of it, that the arbitration provision at issue does not seem to prohibit class arbitration. That means that there would seem to be less of a conflict between arbitration and the PSLRA in this instance.  In some future case a plaintiffs might claim that the conflict is not between the FAA and the PSLRA but between a contractual term (a class-action waiver) and a federal statute.  Absent some change in the Supreme Court's personnel, that argument would also likely fail.

In any case, in this case the court granted Nifty's motion and stayed the proceedings pending arbitration.

Second Circuit Upholds Time Charter Allowing for Viking River Cruises on the Mississippi

Viking River Cruises (Viking) is known for its excursions in Europe and Egypt. It wanted to expand operations into the United States, entering into an agreement through an American subsidiary for a charter though an American company, River 1, LLC (River 1). Viking worked with River 1 because provisions of the Jones Act prohibit Viking, a foreign corporation, from operating on its own. According to the Second Circuit, the deal with River 1 provided that "River 1 employees would manage the ship’s maritime activities, while Viking employees would manage the onboard entertainment operation." They applied to the United States Maritime Administration (MARAD) for approval of the time charter, which MARAD granted in March, 2022. The Viking Mississippi has been operating since September 2022, as you can see in the video below.

American Cruise Lines (ACL) challenged that decision, alleging that the agreement was a "bareboat charter," and that its approval would result in an impermissible transfer of control over the vessel to which the charter pertained to a non-citizen corporation.

The Administrative Procedures Act (APA) applied to ACL's petition for review.  In American Cruise Lines v. United States, the Second Circuit first noted that, under the APA, the Court could only reverse MARAD's determination if it were "arbitrary and capricious." According to the Second Circuit, it was not.

The issue was whether the agreement between Viking and River 1 established a time charter. Under a time charter, “the charterer engages for a fixed period of time a vessel, which remains manned and navigated by the vessel owner, to carry cargo wherever the charterer instructs.” A bareboat charter, by contrast, shifts "exclusive possession and control of the chartered vessel from the owner to the charterer during the charter period." The Court found reasonable MARAD's construction of the charter between Viking and River 1 as a time charter.

Among the features of the charter supporting MARAD's conclusion are the following:

• River 1 provided the crew and the vessel master, who oversees the ship's operations;
• Viking retains power to replace the vessel master, but only in the case of unsatisfactory performance and has not power to name the replacement; and 
•  River 1 maintains primary responsibility for the ship's maintenance and care.

No aspects of the transaction run afoul of the Jones Act or regulations. The regulations prohibit a foreign corporation from absorbing "all of the costs and normal business risks associated with ownership and operation of” the vessel. But here, Viking has not done so. MARAD did not behave impermissibly in finding that an American Fishing Act regulation did not apply to the transaction, perhaps because the cruise ship was not engaged in fishing.

The rest of the opinion has to do with proper procedures under notice and comment provisions. Ultimately, the Second Circuit's decision was a narrow one. Future charters will require independent review, but MARAD's finding that this agreement created a time charter was not arbitrary and capricious.

Now I'm thinking of doing some follow-up research on the next available cruise.

Just in Time for Rosh HaShanah 2024, an Update on Passover 2019

Thanks to the "good citizen" who prodded me to dig up the outcome of Greenwald Caterers LLC v. Lancaster Host LLC, which we previously covered here. I had boldly predicted that the parties would settle the case. But I failed to notice that the case had by then already proceeded to trial.

The case was about a community Passover gathering that went very badly. The hotel that was to host the event was under renovation and was in poor condition when the Passover celebrants arrived. The hotel scrambled to remediate, and apparently it did so quite successfully, as the judgment was more or less a wash.

An April judgment clarified in June resulted in $1,447.60 awarded to the plaintiffs for prevailing on Count I of their amended complaint, and $5,164.28 to defendant (the Hotel) against Greenwald for prevailing on its counterclaim. I could not find a link to the judgment from the bench trial. A Westlaw search turned up only a post-judgment memorandum on attorneys fees.

The District Court found that neither party had prevailed and so it denied the hotel's request for over $240,000 in attorneys' fees. I am surprised that the fees are so low after years of litigation that resulted in a trial.

But now is the season for atoning and forgiving. May all involved be inscribed and sealed in the book of life.

Massachusetts Supreme Judicial Court: One Cheer for Tenure!

Beginning in 2016, Tufts University School of Medicine (Tufts) instituted new policies for tenured faculty members.  Faculty members were now required to cover fifty percent of their salary with external research funding. If they could not do so, their salaries would be cut and their employment status would be reduced from full time to part time. In addition, to maintain their existing lab space, the plaintiffs had to ensure a cost recovery rate equivalent to a that from a grant from the National Institute of Health (NIH). 

Plaintiffs, tenured faculty members at Tufts, sued alleging breach of academic freedom and contractual rights granted through tenure. A trial court granted summary judgment to Tufts on all counts, and plaintiffs appealed. In Wortis v. Trustees of Tufts College, the Massachusetts Supreme Judicial Court noted that economic security and academic freedom are "important norms in the academic community." It therefore reversed the grant of summary judgment as to changes in salary and demotion from full-time to part-time (FTE) status. However, no such norms guarantee access to lab facilities, so the Supreme Judicial Court affirmed the grant of summary judgment on claims relating to Tufts' lab space commitments to plaintiffs. 

Tufts was under budgetary pressure. As of 2018, it had a $6 million operating deficit.  As of 2017, it found that it needed $20 million to support "basic science research infrastructure."  As a result, it changed its policies regarding lab space commitments and full-time status in 2016, 2017, and 2019. Plaintiffs had their salaries cut dramatically and they were informed that they would have their lab space reduced or eliminated. That has not yet occurred.  

The Court begins its analysis by noting that "[t]enure, and the benefits it confers, is defined by the contract between a university and a tenured professor." But the devil is in the details.  What specific promises or guarantees does tenure provide? There is no single document that sets out the mutual obligations of the parties to a tenure agreement. In this case, there are tenure letters, a faculty handbooks, and various university policy documents. The court finds the language in the various documents ambiguous on many issues. Do they set out promises about lab space commitments going forward or do they simply describe the current state of affairs? Do expectations for tenured faculty members set out what one needs to do to get tenure or to retain it?

This is the medical school in Edinburgh -- just sayin'
By LornaMCampbell - Own work, CC BY-SA 4.0 

The Court repeatedly notes that economic security is a term of the agreement between the plaintiffs and Tufts and is not merely "prefatory or hortatory." Tenure, once granted is "permanent and continuous." However, "economic security" is also ambiguous.  That being the case, the Court seems to want to determine what reasonable people would have understood as the parameters of economic security. The Court notes that, before 2009, when the most junior of plaintiffs was granted tenure, Tufts had never linked salaries to ability to attract outside funding, and so plaintiffs would not have known that their salaries could be reduced for that reason. However, Tufts did link salaries to grants in 2009, actually reducing some of plaintiffs' salaries at that time, and none objected. The more recent policies involve more drastic salary reductions, but still, the record is ambiguous.

The record on lab space commitments was less ambiguous. On that subject, the court was mindful that lab space is limited and expensive. It concluded that "even if economic security places limits on the ability of Tufts to reduce the plaintiffs' salary or FTE status, it does not preclude Tufts from allocating limited and expensive lab space based on a faculty member's ability to recover the costs incurred in building and operating lab infrastructure." Moreover, plaintiffs have not been deprived of lab space. Tufts continues to commit itself to providing appropriate space for faculty members to conduct research. It follows that plaintiffs' academic freedom and ability to apply for grants has not been curtailed.

And so, the Supreme Judical Court reversed the judgment of the Superior Court and remanded the case  as to the plaintiffs' claims regarding the compensation policies their Wage Act claim. It affirmed the Superior Court's judgment as to the plaintiffs' lab space guidelines claims.

Divided Ninth Circuit Panel Sends Claims Against Airline to Arbitration

In 2019, Winifredo and Macaria Herrera (the Herreras) purchased international round-trip flights on Cathay Pacific Airways, Ltd. (Cathay Pacific) through a third-party booking website, ASAP Tickets (ASAP). In so doing the Herreras agreed to ASAP's terms, which included a $250/per ticket fee for refunds or exchanges and a clause providing for binding arbitration by the American Arbitration Association. 

While they were traveling, Cathay Pacific canceled their return trip. A Cathay Pacific employee advised them to book with another carrier, assuring them that they would receive a refund, and they did so. Through ASAP, the Herreras requested their refund, but they were offered only travel vouchers valid for a limited time. By then, because of the COVID pandemic, it was clear that the Herreras would not be able to use the vouchers.  Cathay Pacific maintains that it never received a refund request form the Herreras or ASAP.

The Herreras filed a class-action complaint alleging that Cathay Pacific was in breach of contract under the terms of its General Conditions of Carriage for Passengers and Baggage (GCC). The GCC provides for refunds in case of cancellations unless otherwise provided under the Montreal Convention or the GCC's Article 11.  The GCC contained no arbitration clause.

In response to the Herreras' complaint, Cathay Pacific moved to compel arbitration based on equitable estoppel, relying on ASAP's terms and conditions. The District Court denied the motion, as the Herreras' claims did not arise under their agreement with ASAP. Cathay Pacific took an interlocutory appeal.

In a split decision in Herrera v. Cathay Pacific Airways, Ltd., the Ninth Circuit reversed the District Court's denial of Cathay Pacific's motion to compel arbitration and remanded the case with instructions to dismiss or stay proceedings pending arbitration. I believe that under a recent SCOTUS decision, Smith v. Spizzirri, discussed here, the District Court can only stay, not dismiss the case.

The Court first addressed plaintiffs' tardy argument that Cathay Pacific could not compel arbitration because 14 C.F.R. § 253.10 provides:

No carrier may impose any contract of carriage provision containing a choice-of forum clause that attempts to preclude a passenger, or a person who purchases a ticket for air transportation on behalf of a passenger, from bringing a claim against a carrier in any court of competent jurisdiction, including a court within the jurisdiction of that passenger’s residence in the United States (provided that the carrier does business within that jurisdiction).

 The Majority rejected this argument because Cathay Pacific is not imposing a choice-of-forum clause on the Herrera's through the GCC.  It is doing so through "applicable law," and the regulation doesn't say anything to prevent a carrier for doing so. That would really annoy me as exhibiting the sort of "lawyerly" reasoning that allows smarmy well-resourced parties to evade the purpose of regulation. However, the dissenting opinion points out that the Department of Transportation has interpreted the provision as applying only to domestic flights. Fair enough.

Image by DALL-E

There is no arbitration agreement between the parties, so under California law, Cathay Pacific can only compel arbitration if the Herreras’ breach-of-contract claim against Cathay Pacific is “intimately founded in and intertwined with” ASAP’s Terms & Conditions containing the arbitration clause. The Majority reasoned that when Cathay Pacific directed the Herreras to make their refund request through ASAP, they made the latter a "middleman" for refund purposes. Cathay Pacific alleges that it never received a refund request from ASAP and thus never imposed any restrictions on the Herreras' refund.  ASAP may have done so in violation of its terms and conditions, and that is why any claim against Cathay Pacific is intertwined with those terms and conditions.  

Ultimately, estoppel comes down to fairness. The Herreras say it is not fair to compel arbitration in these circumstances, but the Majority disagrees. Article 11 of the GCC allows Cathay Pacific to reimburse ASAP and to direct the Herreras to recovery from ASAP. Cathay Pacific did indeed so direct the Herreras. The Herreras got discounted tickets through ASAP. In return they agreed to an arbitration clause. There is nothing unfair about giving them what they bargained for. 

The Majority thus found that the Herreras were equitably estopped from resisting Cathay Pacific's motion to compel arbitration. There is a strong dissent, questioning whether there are undisputed facts establishing that all aspects of the Herreras' claims are intimately founded in and intertwined with its agreement with ASAP. 

Michael Helfand on Contracts and the Right to Change Religions

I have been writing recently (here and here) on the intersection of contracts law and the First Amendment. In most cases, I argued, courts pay scant attention to contractual rights and obligations when they come up against First Amendment rights. It used to be otherwise, Michael Helfand (right) notes in his article, Contractual Commitments and the Right to Change Religion, forthcoming in the North Carolina Law Review.  He considers cases in which people make binding contractual agreements relating to religion but then change their religious convictions. 

People might enter into a divorce agreement in which each partner commits to raise the children in a certain set of religious beliefs of practices.  Parties might agree to adjudicate disputes through religious arbitral bodies. A congregation might enter into an agreement with a member of the clergy, but one or the other party might conclude that the other no longer follows the orthodox version of the faith. Courts used to enforce such agreements, reasoning that the parties had entered into contracts voluntarily and thus assumed the risk that their religious convictions might shift. Recently, courts have been more rigorous in their protection of religious exercise, and they have been allowing religious interests to win out over contractual commitments. Professor Helfand thinks that a mistake. 

Properly applied, contract law can ensure that religious contracts amplify religious freedom. Where such contractual obligations flow from the free and private choices of the parties, and not government coercion, enforcing religious contracts enhances authentic religious exercise. (5)

Contracts law defenses, such as impracticability and frustration of purpose, Professor Helfand argues, are up to the task of enforcing only those contractual commitments that promote the First Amendment principle of voluntarism. (5-6)

Tough cases abound. Professor Helfand recounts Weisberger v Weisberger. In that 2017 case, a divorced couple had agreed to raise their children in the Hasidic tradition.  The father sought sole custody on the ground that the mother had come out as Lesbian and was introducing the children to other members of the LGBT community. The New York appellate court refused to enforce the agreement, on the ground that courts cannot compel people to adopt a certain religious tradition. Professor Helfand notes that such decisions may constitute a special case.  Courts do not automatically enforce custody agreements but do so only when they further the best interests of the child. (15-16)

In cases involving the Jewish requirement that a husband provide a get before a couple can divorce, courts used to enforce Jewish marriage contracts (ketubot, illustrated at left) even after one party to the marriage had abandoned their faith on the ground that the law should hold them to their agreement. (20) Recently, however, courts have concluded that courts should not coerce people to behave in a way inconsistent with their religious beliefs and have refused to issue positive injunctions relating to gets. (20-21) 

Religious arbitration has, until recently, been another special case. Because the Federal Arbitration Act permits only limited judicial oversight of arbitral decisions, courts have enforced parties' agreements to subject themselves to religious arbitration, even when one party is no longer an adherent of the relevant faith. But some legal scholars and courts are now subjecting that tradition to Free Exercise and statutory (RFRA) challenges.  However, Professor Helfand cites only one case, which involved allegations of rape by a Church of Scientology member, a cover-up, and harassment by church authorities. The court recognized a Free Exercise right to leave a religion. (21-26) Hard cases make bad law? Seems like ordinary unconscionability doctrine could have done the trick, given that it seems pretty unlikely that a church arbitral body would be free from bias against a party suing the church.

Professor Helfand next turns his attention to changes in belief in the context of the ministerial exception to non-discrimination law when the employer is a religious institution. Some ministerial exception cases seem clearly absurd. A cantor at a synagogue claimed that he was fired without the contractually-guaranteed notice of three "strikes" that justified termination. The court dismissed the claim, citing the ministerial exception, notwithstanding the fact that the contractual claim at issue had nothing ministerial about it. (28-29) Other courts have been more careful, distinguishing breach of contract claims from employment discrimination claims in the ministerial context. (29-30)

With this caselaw as a backdrop, Professor Helfand then proceeds to his main argument: that the enforcement of religious contracts, notwithstanding changed beliefs, does not not undermine religious freedom. Free exercise of religion and the enforcement contractual obligations can be reconciled as emanating from the same principle: voluntarism. The Article deftly establishes the extent to which both legal scholars and courts have understood protections of religious freedom in voluntaristic terms. People should be free to choose their religions and exercise their religions free from government interference. (33-37) Where courts can apply neutral general principles of contract law, doing so does not violate a principle of voluntarism, so long as the assumption of contractual obligations was a product of free and private choices. Contracts law, Professor Helfand argues, helps us determine whether the obligations in question were voluntary. (37-43)

Professor Helfand regards the freedom of religion and the enforcement of contractual obligations as mutually supportive of the principle of voluntarism. Contracts excuses, such as frustration of purpose and impracticability, enable contract law to establish when that principle would be thwarted by enforcement of religious contracts when one party is no longer an adherent of the religion whose dictates will govern. (43-64) 

At first blush, it might seem that contractual excuse undermines the sanctity of contracts and thus frustrates the voluntarism at the heart of contract formation. Not so, Professor Helfand argues, drawing on the scholarship of Hanoch Dagan. Rather, when we enter into contracts, we legislate for our future selves, and setting that private legislation aside is consistent with the voluntarism at the heart of Professor Helfand's understanding of contracts theory, only when some unforeseen event that goes to a basic assumption of the contract either renders performance impracticable or frustrates the purpose of the party seeking excuse. In such circumstances, enforcing the contract would not enact the parties' wills, because the parties never contemplated the unforeseen change negating their basic assumption. (52-54)

The problem with this analysis is that that the party seeking enforcement has a ready response.  The change in the other party's beliefs was not unforeseen. The contractual provisions providing for resolution in accordance with the parties' shared religious beliefs would be unnecessary if the parties' continued adherence to those beliefs were guaranteed. The party seeking performance entered into an agreement assuming that the contract would be interpreted consistent with their religious beliefs, and they continue to operate on that assumption. From their perspective, not only was there nothing unforeseen, nothing has changed at all. Professor Helfand's discussion of the problem of foreseeability (60-64), which focuses on the general possibility that a person might change their faith, does not, in my view, adequately account for the fact that fact that a contract that provides for a religious adjudication is, as a matter of fact, acknowledging the foreseeability of a loss of faith by one or the other party.

Notwithstanding the broad embrace of the voluntarist model by courts and the scholarly literature, there is a danger of overstating it. The state is not the only entity that may coerce assent. Contracts of adhesion create an illusion of free and voluntary choice that is often wholly lacking, as discussed in our post on Andrea Boyack's work earlier this year.  Religious choices may be a product of upbringing rather than considered choice. Or one might choose a religious community based on factors other than adherence to religious doctrine. The trouble with Professor Helfand's voluntarist model, it seems to me, arises most acutely when religious institutions impose form contracts on their adherents. In that context, one can argue that, both from a Free Exercise and from a freedom of contract perspective, the enforcement of religious contracts undermines the principle of voluntarism.

Professor Helfand's preferred doctrines are excuses. They arise when there has been an unforeseen change in circumstances after the contract has been formed.  Impracticability and frustration of purpose do nothing to address failures of voluntarism in the formation of religious contracts. Moreover, it is hard to imagine that the party claiming excuse would not bear the risk of this unforeseen change of heart. This is especially so, as parties to such agreements could condition their performance obligations on continued adherence to the faith, as Professor Helfand acknowledges. (64) Finally, it is quite a stretch to think that a change in belief would render performance impracticable. Stretching the doctrine to allow excuse in cases where performance hinged on one party's subjective beliefs would risk rendering all religious contracts subject to an implied condition so broad as to render the contractual promise illusory.

And so, while Professor Helfand proposes that contracts law, in the form of excuses, could invalidate religious contracts in some circumstances based on an unforeseen change in one of the party's religious convictions, I think excuses would never provide a basis for non-enforcement of the contracts about which Professor Helfand writes. Professor Helfand does not disagree, as he notes that the excuses rarely succeed. (56) He provides no examples of these defenses working in connection with the cases he describes, and he notes the problem that the party seeking excuse must not be at fault for the occurrence of the unforeseen event. (58-60) Professor Helfand's earlier work, focusing on unconscionability and duress defenses to religious contracts might hold more promise.

However, contracts law could produce the results that Professor Helfand desires either through a more exacting inquiry into whether the parties had given meaningful assent to the agreement or through an adoption of the Jamal Greene's rights medication approach for which I have advocated in my scholarship.  The latter would entail rejecting the rights absolutism in which our First Amendment jurisprudence abounds and instead weighing the contracts-based and religious-liberty-based interests in each individual case and giving effect to the intentions of the parties in light of those interests.

Force Majeure, COVID, and a Win for Lizzo

I've long been on the hunt for a case that illustrates the interaction between a force majeure clause and the COVID-19 pandemic.  This might be the one.  It also makes use of the surplusage canon of construction, so if one has the time to work through a lengthy force majeure clause, it could be a useful teaching case.

In 2019, VFLA Eventco, LLC (VFLA) announced that there would be a two-day music festival, the Virgin Fest Los Angeles in June 2020.  In February and March, 2020, VFLA entered into contracts with agencies representing Ellie Goulding, Kali Uchis, and Lizzo (collectively the Artists).  William Morris Endeavor Entertainment, LLC (WME) acted as the agent for all three artists and negotiated the contracts on their behalf.  The contract provided that WME should not be liable under the contract, and there was a force majeure clause.  In this clause, VFLA is the "Purchaser" and the agencies representing the Artists are the "Producer":

A ‘Force Majeure Event’ means any act beyond the reasonable control of Producer, Artist, or Purchaser which makes any performance by Artist impossible, infeasible, or unsafe (including, but not limited to, acts of God, terrorism, failure or delay of transportation, death, illness, or injury of Artist or Artist’s immediate family (e.g., spouses, siblings, children, parents), and civil disorder). In the event of cancelation due to Force Majeure then all parties will be fully excused and there shall be no claim for damages, and subject to the terms set forth herein, Producer shall return any deposit amount(s) (i.e., any amount paid to Producer pursuant to the Performance Contract prior to payment of the Balance) previously received (unless otherwise agreed). However, if the Artist is otherwise ready, willing, and able to perform Purchaser will pay Producer the full Guarantee unless such cancellation is the result of Artist’s death, illness, or injury, or that of its immediate family, in which case Producer shall return such applicable pro-rata portion of the Guarantee previously received unless otherwise agreed.

[Italics added] This language was negotiated and had been updated based on a model used for another event.  The language that I have italicized was new language inserted by WME and agreed to by VFLA.

VFLA transferred to WME’s trust account nonrefundable deposits of $400,000 for Kali Uchis, $600,000 for Goulding, and $5 million for Lizzo. The deposits were consideration for the artists’ performance at Virgin Fest, as well as for exclusivity and advertising rights, which allowed for the use of their images for Virgin Fest's marketing materials and subjected the Artists to certain restrictions on public performances in temporal or geographic proximity to the Virgin Fest.

And of course, the whole Virgin Fest was shut down because of COVID.  VFLA sought the return of the deposits, and the parties disagreed as to the meaning of the force majeure clause. After discovery, the parties filed motions for summary judgment.  The trial court granted summary judgment in favor of WME and the Artists and denied VFLA's motion.  The language of the force majeure clause had been revised to favor the Artists.   

Now Lizzo Doesn't Have to Borrow James Madison's Flute
By Library of Congress Life 

In VFLA Eventco, LLC v. William Morris Endeavor Entertainment, LLC , a California appellate court affirmed.  The appellate court broke down the force majeure clause according to its three sentences.  The first sentence defines "force majeure," and the parties do not dispute that the pandemic was a force majeure event.  The meaning of the second sentence was also not in dispute -- the Artists had to return the deposits in case of a force majeure event unless another performance term applies.  

The dispute centers on the third sentence, which states that the Artists do not have to return the deposits if they are "otherwise ready, willing, and able to perform."  The Artists contend that the best reading of this language is that, but for the force majeure event, they would perform, which is clearly the case.  VFLA reads "otherwise" to mean something more like "notwithstanding."  In the court's view, the Artists reading is the better one, as VFLA's reading would "deprive the third sentence of any meaning and render it surplusage." The Artists could never show that they were ready, willing, and able to perform notwithstanding a force majeure event, which is defined as any event that renders performance "impossible, infeasible, or unsafe."

VFLA argued that the performance in this case would be illegal, which is different from "impossible, infeasible, or unsafe," but the court did not buy it, as the force majeure clause doesn't mention illegality, and illegality could make performance impossible.  The court also addresses the exceptions to the exceptions in the third sentence, which provides that the Artists do have to return the deposits if they or an immediate family member die, become ill, or are injured.  The court concludes that VFLA's reading cannot be squared with this language, again relying on the surplusage canon. 

Personally, I don't think there is a reading that would avoid rendering some part of this language surplusage.  If one of he artists dies, she is definitely unable to perform and so the third sentence would not apply at all.  VFLA instead argued that if it had intended to accept all risk of a force majeure event, unless it involved death, injury, or illness of an artist or a family member of an artist, it could have drafted a much shorter provision.  The court conceded the point but the fact that the provision could have been better drafted is no reason not to give effect to its most likely meaning.

There is a lengthy section of the opinion dealing with parol evidence.  The trial court determined that the parol evidence was more or less in equipoise and did not provide a basis for giving effect to VFLA's reading of the force majeure clause.  As there were no factual disputes about the parol evidence that the trial court considered, there was no reason why the trial court could not decide the matter on summary judgment.  If I were to use this as teaching case, leaving this stuff out would help shorten the case.

There are other parts of the opinion that I would also omit if I were to use this as a teaching case. The court addresses VFLA's claim that the Artists have not proved that they were ready, willing, and able to perform, even though that issue had not been preserved.  VFLA alleges that a ruling in favor of the Artists would effect a forfeiture, but a forfeiture requires a breach, and because of the force majeure clause, the Artists are not in breach.  VFLA's argument that allowing the Artists to keep the deposits would render the contract illegal provides an interesting hypo along the lines of Hanford v. Connecticut Fair Association, a case involving the Babyland Amusement Company (whose letterhead appears above). In deciding that the Artists can keep their deposits (the opposite result from Hanford), the court is not promoting illegality; it is merely giving effect to the parties' contractual allocation of risk.

And this really is a case that comes down to allocation of risk.  Just as I think it absurd that a college football coach should be paid $75 million for not coaching (or for coaching, but that's another matter), I think it absurd that Lizzo should get $5 million for not performing.  But apparently it was so important to VFLA to secure Lizzo as a performer so that it could generate an audience for its music festival that VFLA was willing to take the risk of losing that $5 million in case of cancellation.  In the alternative, VFLA agreed to contractual language that forced it to take on more risk than it intended.  Either way, it should be bound by its objective manifestations of assent. 

Absent evidence that the allocation of risk was commercially unreasonable (another canon of construction), it seems like the court got it right.  It does not seem that VFLA made a commercial unreasonableness argument.  I lack the industry-specific knowledge to judge whether it is commercially unreasonable to pay a seven-figure, non-refundable deposit to an artist to secure their commitment to perform at a music festival.

Big CISG Case in Florida Involving Formation via WhatsApp

Fertilizantes Toncantins (FTO) is a Brazilian importer and distributor, specializing in fertilizer.  TGO Agriculture (TGO) is a commodities trader, specializing in ammonium sulphate and other chemicals used in agriculture.  The parties entered into three contracts for the sale of ammonium sulphate in 2017 prior to entering into the September 2020 contract at issue in the case.

Ammonium Nitrate

In each of these prior contracts, the parties first negotiated the terms via calls, e-mails and WhatsApp, then drafted informal memoranda, and finally TGO issued a proposed written contract.  While FTO claimed that the final written agreements merely memorialized terms already agreed upon, they actually contained many provisions and details not previously discussed.  In each case, the shipment of the goods pre-dated the parties' signing of the contracts, but the goods, which had to be shipped from China to Brazil, arrived later.

There was a discrepancy between the bills of lading and invoices for the ammonium nitrate shipped, on the one hand, and the contracts.  The former said that the shipments contained 21% nitrogen; the contract said 20,5%.  FTO asked for a change in the contract to 21%, but TGO refused, saying that 20.5% was the best that the producer could guarantee.  Ammonium sulfate that tis 20.5% nitrogen is called "steel grade"; ammonium sulfate that is 21% nitrogen is called "capro grade" and is significantly more expensive.

The September 2020 contract was for 20,000 metric tons of ammonium nitrate, later amended to 45,000 metric tons at a price of $145/metric ton.  All of the negotiations were conducted, as before, via e-mail and text, and internal communications evidence TGO's knowledge of the terms of the transaction.  However, this time, TGO never sent the final contract.  TGO then refused to deliver the ammonium sulfate, claiming that the parties had never finalized the deal.

Two developments may explain TGO's unwillingness to deliver on the September 2020 contract.  First, FTO complained about the quality of a shipment that it received in December 2020.  TGO's agent sent pictures of the delivery to FTO, characterizing it as a "shit show."  Second the price of ammonium nitrate rose dramatically.  As a result, when FTO made cover purchases to make up for the 45,000 metric tons it did not receive from TGO, the cost over contracts price was more than $6.5 million.

Ammonium Nitrate

The case is procedurally strange, but it's Florida, so . . . .  The court held a bench trial in July 2023.  There was then extensive post-trial briefing.  The court then issued its finding of facts and conclusions of law in Fertilizantes Tocantins S.A. v. TGO Agriculture (USA) Inc. in March 2024.  It found that the CISG applied and that, under the CISG, the WhatsApp messages sufficed to form a contract, even if a later written document was contemplated.

Based on the parties' prior dealings, the court found that there was a sufficiently definite offer followed by a clear acceptance of the offer.  Yes, there were open terms, but those terms could be implied through prior dealings and industry custom.  The CISG requires only price, product, and quantity as essential terms.  All were specified in the parties' WhatsApp messages.

The court allowed FTO to recover all of its cover costs.  It also allowed for the recovery of incidental damages.  Finally, the court allowed for the recovery of pre-judgment interest, for a grand total of over $7.7 million, with post-judgment interest accruing as the case steams its way towards appeal. 

Fifth Circuit Will Not Allow Insured's Gamesmanship to Defeat Insurers' Motion to Compel Arbitration

In May 2020, Bufkin Enterprises, L.L.C. (Bufkin) purchased insurance coverage from ten insurers—eight domestic and two foreign—to insure Bufkin’s property in Louisiana. There was one contract, but it stated that it should be treated as a series of  separate contracts between Bufkin and each of the insurers. The contract included a provision calling for arbitration of disputes in New York.  

In August 2020, Hurricane Laura damaged Bufkin's Louisiana property, and a dispute ensued over insurance coverage. Bufkin first sued the eight domestic insurers. It then amended its complaint to include the international insurers, but the amendment was filed, so says the court, for the sole purpose of then seeking dismissal with prejudice of the claims against the international insurers. That strategy was an attempt to avoid arbitration. It's a three-dimensional chess move worthy of Mr. Spock of blessed memory.

Image by DALL-E

The District Court denied the insurers' motion to compel arbitration. In Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co., the Fifth Circuit reversed. The reason for the multiple-dimensional chess is a bit obscure, but it seems to involve "reverse preemption" of the Federal Arbitration Act (FAA) facilitated by the McCarran-Ferguson Act and a Louisiana Statute. 

The Fifth Circuit did not reach that issue because it decided the case on equitable estoppel grounds. The District Court opinion in the case spells out the reverse preemption gambit in basic checkers moves. McCarran-Ferguson provides that state law governs insurance contracts.  Under the last-in-time doctrine, McCarran Ferguson supersedes the FAA.  Louisiana state law prohibits the arbitration of insurance claims. Q.E.D.  According to the District Court, this reverse preemption applies to the FAA but not to the New York Convention, which governs international arbitrations. The contracts with the international insurance carriers are important, as they are governed by the New York Convention, rather than the FAA.

But the District Court erred, said the Fifth Circuit, on the equitable estoppel argument. Equitable estoppel is about fairness. It applies, under relevant Fifth Circuit precedent, in two situations:  when a signatory to an agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the non-signatory; and when a signatory to a contract containing an arbitration clause raises allegations of substantially “interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.”   

The Fifth Circuit found that this case falls into the second situation, even if we treat the one contract as ten separate contracts, making the domestic insurers "non-signatories." In its amended complaint, Bufkin made the same allegations with respect to all defendants, in effect conceding that their conduct was "interdependent and concerted." Compelling arbitration would not, in this instance, violate Louisiana public policy, because neither the relevant statute nor reverse preemption apply to the New York Convention.  

It seems like the right result, as a matter of law and as an application of precedent, but I wonder why Louisiana would not want to allow arbitration of insurance claims by domestic insurers but allow it for cases involving foreign insurers. It may be that some clever weighing of interests has occurred here -- Louisiana's interest in protecting insureds from the imagined horrors of arbitration versus the need to open Louisiana's insurance markets to foreign insurers who might not want to be homered in the Louisiana courts. It also might be that the legislators behind Louisiana's statute gave absolutely no thought to the effect of the New York Convention on their attempt to shield insureds from mandatory arbitration.

Ninth Circuit Affirms Ruling that Suquamish Tribal Court Has Exclusive Jurisdiction over Insurance Claims

I mentioned last summer that I have come to appreciate how Indian law intersects with almost every substantive body of law. Here's another example in the contracts context. The issue in Lexington Ins. Co. v. Smith was whether a tribal court had jurisdiction over a claim against  nonmember, off-reservation insurance companies that participate in an insurance program tailored to and offered exclusively to tribes.  

In Montana v. United States (1981), SCOTUS recognized two situations that empower tribal courts to exercise jurisdiction over nonmembers. They have jurisdiction over: “the activities of nonmembers who enter consensual relationships with the tribe or its members” and the conduct of nonmembers that “threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.” The Ninth Circuit found that this case fell squarely within the first part of the Montana test and thus that the Tribal Court had jurisdiction.    

Beginning in 2016, the Suquamish Tribe (the Tribe) and the Port Madison Reservation (the Reservation) over which it has sovereign authority purchased insurance policies from the Lexington Insurance Company (Lexington) and others that joined the case through the Tribal Property Insurance Program (“Tribal Program”), which is administered by Alliant Specialty Services, Inc., under the moniker Tribal First. Tribal First specializes in tailoring insurance policies to the needs of Indian communities and Indian employees. 

The troubles arose in 2020, when many of the insured business enterprises shut down due to the COVID-19 pandemic. The Tribe and the Reservation made claims on their policies, and Lexington coverage. The Tribe and the Reservation then brought suit for breach of contract in Tribal Court. The parties agreed to stay the proceedings there while Lexington sought declaratory judgment against the Tribal Court in Federal Court. The District Court granted summary judgment to the Tribal Court, finding that the Tribal Court did indeed have jurisdiction over the claims against Lexington, and the Ninth Circuit affirmed.

The court begins its analysis by laying out the parameters of tribal authority. A tribe can only exercise jurisdiction over nonmembers within its sovereign territory. Even within its territory, tribal courts can only exercise jurisdiction over matters within the tribe's legislative powers.

In this case, Lexington's relevant conduct related to properties within tribal lands. The fact that negotiations of the insurance policies occurred elsewhere and that no Lexington employees set foot on tribal land is irrelevant.  What matters is that Lexington was conducting business with the Tribe and that Lexington's business was related to Tribal lands.  Proceeding to the Montana test, the court expressed some incredulity that Lexington would feign lack of awareness that its contracts with the Tribe applies to properties on Tribal lands.  Nor did the court have any difficulty identifying the nexus between the parties' consensual relationship and the Tribe's regulatory powers. The court concluded that the Tribe had regulatory power over Lexington under Montana's first exception to the general rule that Tribes cannot exercise jurisdiction over nonmembers.

On September 16, by a vote of 16-6, the full Ninth Circuit denied Lexington's motion for rehearing en banc. The rhetoric of the opposing sides reflects an intense and fundamental disagreement. The majority accuses the dissent of elevating form over substance. The dissent emphasizes the parties' stipulation that no Lexington employee ever set foot on tribal lands in connection with the transaction at issue and thus argues that allowing the Tribe to hale the non-member insurer into Tribal Court "defies both the Constitution and Supreme Court precedent. It seems quite possible that SCOTUS could take this case to revisit some of the consequences of McGirt v. Oklahoma, at least by analogy.

Colorado Taxpayer Bill of Rights Provision Provides No Grounds for Breach of Contract Claim

Wound Healing: Achilles treats Patroklus

In 2018, the Center for Wound Healing and Hyperbaric Medicine of Burlington, Colorado (the Center) and Kit County Health Services District (the District) entered into an Administrative Services Agreement (the Agreement). Under the agreement, the Center established a facility at the county hospital, and the District was to pay the Center 80% of the District's net collections for hyperbaric care and $75 per wound care treatment performed at the Center, subject to a 3%/year increase. The Agreement originally had a seven year term, with provisions for acceleration of payments due in case of breach by either party. In order to comply with Colorado's taxpayer bill of rights law (TABOR), the Agreement provided:

[A]ny provision of the Agreement . . . that requires payment of any nature in fiscal years subsequent to the current fiscal year, and for which there are no present cash reserves pledged irrevocably for purposes of the payment of such obligations shall be contingent upon future appropriations by [the District] of sufficient funds for purposes of payment of such obligations for any future fiscal year.

In August 2020, the District became concerned about irregularities in the Center's submissions for Medicare reimbursement. The District then stopped submitting claims from the Center to Medicare for reimbursement. In June, 2021, the Center gave the District notice that it was in material breach of the Agreement. The District responded by terminating the Agreement and ceasing all payments. The Center then sent a demand letter, invoking the Agreement's provisions for accelerated payments. The District paid its June, 2021 invoice but made no further payments. The Center sued, seeking $8 million under the acceleration provisions. In 2023, the county hospital paid a $3 million fine to the U.S. Department of Health and Human Services for charging the government for services at the Center that were never performed or supervised as billed.

The District filed a motion in the trial court, alleging that the effect of the TABOR provision quoted above was that the District could not be liable where it had made no appropriations. It made no appropriations following the termination of the Agreement.  The trial court agreed and dismissed the Center's claims.

In Ctr. for Wound Healing & Hyperbaric Med. of Burlington, Colo. v. Kit Carson Cnty. Health Serv. Dist., an intermediate appellate court affirmed in part. In so deciding, the court did not need to consider TABOR. The above-quoted language rendered the Agreement TABOR-compliant. However, regardless of TABOR, the provision by itself provided that the acceleration clause would not be triggered where, as here, the District had appropriated no funds in connection with the Agreement. However, questions remained as to payments for services already rendered and as to whether there had been appropriations for the remainder of fiscal year 2021. The court reversed the trial court's entry of judgment to the extent that it precluded the Center from recovering unpaid sums that the Center claims correspond to fiscal year 2021 and remanded for further proceedings.

Friday Frivolity: Arizona Couple Excluded from Mickey Mouse Club

Thanks to OCU 1L Lynne Neveu (left) for sharing with me this cringe-inducing story. According to Seth Abramovitch of The Hollywood Reporter, Scott and Diana Anderson are both sixty, and they have been together for forty-four years. They own a golf course in Arizona.

Little known to those of us who think of Disney parks as places to take the children for occasional trips, Disney has an exclusive venue for Disney VIPs (that is, people who shell out a lot of money) called Club 33. The Andersons worked at it for twelve years before they were invited to join the Club, and they paid $50,000 (or $40,000, the story is not entirely internally consistent) for their first year of membership. Club 33, in case you were wondering, is located above the Pirates of the Caribbean ride, and they serve hard liquor there, a fact that will play a role in the rest of our story.  There is also a venue in California Adventure called the 1901 Lounge -- I hope that's because there you can also get absinthe and laudanum, or perhaps some old timey Coca Cola with all the original ingredients, but I digress. The Andersons visited these elite establishments upwards of eighty days a year.

But then tragedy struck. Mr. Anderson was cited for public intoxication at one of the venues. He protested that his symptoms were explained by a vestibular migraine brought on when he had a sip or two of red wine. Disney expelled the Andersons from the club forever. To make matters worse, Disney had Snow White's stepmother (right) deliver the news. The Andersons claim that Disney was retaliating against them for having accused another Club member of sexual harassment.  $400,000 in legal fees later, a jury sided with Disney.

Initially, it seemed that the Andersons were going to continue to fight, but now they have decided to take the high road. The article in The Hollywood Reporter includes a lengthy, dishy interview with the couple. Some highlights include:

• Annual fees for membership is $32,000, which the Andersons, who spent twelve times that amount trying to say in the Club, now say is "just insane";
• "Club 33 is really a glorified annual pass";
• And yet, Club members get booted out if Tom Hanks decides to have Thanksgiving Dinner at the venue, and don't get them started on Katy Perry!

And then the real dishy stuff begins:

• Club members get up to 100 park tickets, which they (not the Andersons, of course) then sell to Muggles;
• Club members (not the Andersons, of course) raid the Club for the latest merch and then sell it to . . . Muggles;
• Club members used to have access to Walt Disney's rooms, with original furnishings, and they could even use his bathroom, but now it is all roped off (I wonder why . . . ) and the furniture has been replaced with replicas;
• "It's a cult, and Walt's the messiah," say the couple, who brag about using Walt's toilet.

The couple had been disciplined by the Club before. After a member of their party knocked over a drink, the Club refused to offer them any more alcoholic beverages. Mrs. Anderson had words, at least one of which began with "f," with the manager, which resulted in a suspension.  Was Mrs. Anderson drunk? Impossible! Because "everyone knows" that she waters down her drinks.

Heard enough? Imagine how the reporter feels.  The interview, which I have reduced to bullet points, had already been edited for length and clarity and still was the length of a short Bildungsroman. And yet I still have so many follow-ups!

And that's the news from the Happiest Place on Earth, where the men are strong, the women's drinks are watered, and the children . . .  are not allowed entry.

Derivative Sovereign Immunity Claim Fails in the First Circuit

By Sombrillaazul - Own work, CC BY-SA 3.0

In October, 2020, a group of au pairs sued Cultural Care, Inc. (Cultural Care), a company that places foreign nationals as au pairs with US host families. The allegations are about what you would expect -- violations of the Federal Labor Standards Act (FLSA), various state wage and overtime laws, and deceptive trade practices. Cultural Care responded that all claims against it are barred under the derivative sovereign immunity doctrine articulated in Yearsley v. W.A. Ross Construction Company, 309 U.S. 18 (1940). In that case, SCOTUS held that "there is no ground for holding [an] agent [of the Government] liable" for actions "authorized and directed" by the Government and taken "under" Government "authority" that has been "validly conferred." 

In August, 2021, the District Court rejected that argument, while dismissing some state law claims for lack of standing. Cultural Care brought an interlocutory appeal on the Yearsley issue and tried to bring others under pendant appellate jurisdiction. The resolution of the interlocutory appeal has turned out to be quite complicated, involving a request that the U.S. Department of State weigh in and two different First Circuit panels.

Image by DALL-E

In April 2023, Posada v. Cultural Care, Inc., the First Circuit affirmed the decision of the District Court as to Yearsley and found that it had no jurisdiction to hear anything else on an interlocutory appeal. Cultural Care's next move was a motion to compel arbitration.  Meanwhile, nearly 8000 individuals have joined the class making FLSA claims. The District Court denied that motion in February, 2024 on multiple grounds in Posada v. Cultural Care, Inc.

Some of Cultural Care's arguments seem to border on the frivolous. The arbitration agreement dates from 2023. None of the named plaintiffs signed it, and Cultural Care has submitted no evidence that any individuals who have opted into the suit have signed it. To the extent that Cultural Care moved to compel arbitration based on the 2023 agreement, its motion was denied without prejudice should Cultural Care be able to name individuals in the opt-in group to whom it would apply.

The District Court rejected more decisively Cultural Care's claim that plaintiffs were obligated to arbitrate in Switzerland because of a arbitration agreement they signed with a related company, International Care. Three years into the litigation, there is a strong presumption that Cultural Care has waived any right to arbitrate. Given that Cultural Care set out with gusto to have the case dismissed by a federal court, the District Court found the right to arbitrate waived. 

Even if that were not the case, Cultural Care is not a party to any arbitration agreement with plaintiffs. It argues either that it should have rights under the arbitration agreement between International Care and plaintiffs as a third party beneficiary or by reason of estoppel.  Under Massachusetts law, a third party beneficiary must present clear and definite evidence of the parties' intent that it benefit from the provision. Cultural Care could not meet that standard. 

The estoppel claim is once again borderline frivolous. Under Massachusetts law, "a nonsignatory may compel arbitration against a signatory where that signatory (1) “must rely on the terms of the written agreement in asserting its claims against the nonsignatory”; or (2) “raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more signatories to the contract.” Cultural Care relies on the first argument, but the contract with International Care does not set out the terms of plaintiffs' employment by Cultural Care. In any case, plaintiffs bring only statutory claims, so they are not relying "on the terms of the written agreement in asserting [their] claims against the nonsignatory."

Motion to compel denied. Cultural Care has appealed, and the appeal has not yet been decided.  Plaintiffs are going to be old enough to need their own au pairs by the time any court rules on the merits of their claims.  We are well into justice delayed is justice denied territory.  If some court eventually rules that plaintiffs are entitled to some recovery, I hope there is some entity still  in existence that can pay them, and not just the attorneys. 

Even Judge Easterbrook Won't Enforce Ancestry.com's Arbitration Agreement Against Minors

Plaintiffs in this case are children. Their guardians registered on Ancenstry.com and in so doing agreed to arbitration.  While the plaintiffs' guardians sent in the plaintiffs' saliva samples to Ancestry.com, plaintiffs did not read Ancestry.com's terms, nor were they required to do so.  Plaintiffs allege that they never created their own Ancestry.com accounts, did not access their guardians accounts, did not receive their DNA test results, or interact with Ancestry’s website in any way before filing suit. 

Ancestry.com was then acquired by Blackstone, Inc. (Blackstone), and plaintiffs allege that Ancsetry.com violated their privacy rights by disclosing private genetic information to Blackstone. Ancestry.com moved to compel arbitration. The district court denied the motion, and in Coatney v. Ancestry.com DNA, LLC, the Seventh Circuit affirmed. The opinion is by Judge Brennan, but in fairness to Judge Easterbrook, I note that he joined the opinion, causing me to further revise my view that his position is "arbitration for all."

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On appeal, Ancestry.com first argued that plaintiffs were bound by its terms through the conduct of sharing their DNA. The Seventh Circuit rejected that argument because the terms of Ancestry.com's agreement with plaintiffs' guardians unambiguously binds only the guardians. Ancestry.com cited only one unpublished district court opinion in support of its consent-through-conduct argument, but the Seventh Circuit found the case distinguishable, based on the very different language in the relevant agreements.

Ancestry.com next tried to argue that plaintiffs were bound as closely-related or third-party beneficiaries. This section of the opinion is very lengthy, but the Seventh Circuit states right from the start that Illinois law has a strong presumption against biding third-parties to contractual obligations. To make matters worse, Ancestry.com's terms exclude third parties.

Ancestry.com's final argument is that plaintiff's directly benefitted form the guardians' accounts and thus are estopped from challenging the motion to compel arbitration.  This section of the opinion is also very long, in part because there is scant authority for the doctrine of direct-benefits estoppel under Illinois law.  I wonder why courts don't more often certify questions to the state supreme court in such instances.  Instead, the Seventh Circuit plows ahead.

The fact that the plaintiffs in this case never accessed Ancestry.com themselves or saw any of the genetic information that their guardians gathered makes this case much easier.  It also likely makes the ruling very narrow.  My instinct, based on zero experience with Ancestry.com, is that it would be rare that parents would gather their children's genetic material and send it in to Ancestry.com for analysis and then that the family would never discuss the results.  If my instincts are correct, this rare victory for the foes of mandatory arbitration may be limited to its unique facts.

New York Court of Appeals Weighs in on COVID Business Interruption Claims

We were covering this sort of claim a lot back in 2021, for example here and here.  Things didn't go well for businesses. Many of the cases were being decided in federal courts, even though insurance issues are a matter of state law. The federal courts engaged in Erie guessing, and they consistently guessed that state courts would find that COVID caused no "direct physical loss or damage" covered under business interruption insurance policies.

Back in February, New York's Court of Appeals confirmed in Consolidated Restaurant Operations, Inc. v. Westport Insurance Corporation that, at least with respect to New York law, the federal courts guessed right. With admirable New York-style directness, the Court foregrounds its conclusion:

We hold that direct physical loss or damage requires a material alteration or a complete and persistent dispossession of insured property, which petitioner has not alleged. We therefore affirm the order below dismissing the complaint.

It's a tale as old as 2020. Consolidated Restaurant Operations (CRO) owned and operated dozens of restaurants. Due to the presence of the virus in its restaurants and government-ordered closures of non-essential businesses, CRO had to curtail or shut down its businesses. It sought insurance coverage for its business losses, and its insurer (Westport) denied coverage. The trial court granted Westport's motion to dismiss, and the Appellate Division affirmed.

On appeal, CRO tried two arguments. First, it argued that the court should interpret "physical loss" "to encompass situations where a physical event occurs on insured property and impairs its functionality or renders it, in whole or in part, unusable for its intended purpose." Second, if required to allege a physical alteration to its property, CRO claimed that it had so alleged. The Court of Appeals said, "No and no."

There are plenty of similar cases in which courts have held that "physical loss" requires a physical alteration of the property. CRO came up with a few cases from other jurisdictions in which courts treated contamination, e.g., through gasoline fumes, as physical loss, but only in situations where the harm was permanent and complete, making it impossible for the premises to serve their function. New York thus joined a large number of jurisdictions that have ruled in favor of insurers on such claims. The Court of Appeals dispensed with CRO's argument that it had pled physical loss in a few paragraphs.  While CRO had alleged the presence of the virus in its restaurants, it had not alleged any physical loss caused by the presence of the virus.

Beating Cubs' Arbitration Clause Is Easier in Illinois than Tennessee

Yesterday, we covered a journalist's defeat of the Chicago Cubs' attempt to compel arbitration of his negligence claims. The Illinois court found, as it had found in the 2021 case, Zuniga v. Major League Baseball, that the Cubs did not put people on notice of arbitration terms by referencing their website, which links to an arbitration agreement, on the back of tickets or press credentials.

A Tennessee court reached the opposite conclusion based on very similar facts involving the Cubs' Double-A affiliate, the Tennessee Smokies. Deborah Roberts attended a Smokies game on April 22, 2022 and sat in the front row near the third-base dugout. She was hit by a foul ball and injured, requiring a three-day hospitalization and further treatment. Her husband immediately met with team representatives, but the Robertses claim that they only learned of the Smokies' arbitration clause when the team filed a motion to compel arbitration. As in Zuniga, the motion to compel was based on notice on the back of Ms. Roberts' ticket. The court provides the added particulars that the notice was in part in bold and in part in ALLCAPS, and it referenced arbitration, as well as a class-action waiver to be found on the team website.  To me, the most relevant fact is that all of the print on the back of the ticket was in 4-point font [this is eight-point because our platform knows that going small than that is absurd], which would make it completely illegible to me and likely to any potential reader over the age of forty. Moreover, the court does not seem to read this blog, because if it did it would know Yonathan Arbel and Andrew Toler's work showing that people are actually less likely to read and understand ALLCAPS text than they are to read and understand ordinary text. 

Applying Tennessee law, the District Court in Roberts v. Boyd Sports, LLC found that the parties had formed an arbitration agreement.  It's reasoning is summarized as follows:

. . . [A] reasonable onlooker or objective observer would conclude that the parties mutually intended to assent to the terms on the tickets by Plaintiffs' acceptance of the tickets and subsequent entry into the stadium. Plaintiffs were provided with ample opportunity to read, investigate, and understand the provisions on their tickets, both when received, and certainly in the 7 days afterward when they were investigating their options to resolve the injury that occurred. According to the undisputed facts here, they never inquired as to the terms or indicated confusion or lack of understanding. Simply failing to read the terms does not present a party with the ability plead ignorance to or reject the terms after the fact. 

The seven-day period is relevant because, had plaintiffs during that time found the arbitration agreement on the team website and worked through its terms, they would have seen that ticketholders have an option to opt-out of the arbitration provision within seven days.  To do so, plaintiffs would have had to know their account number, which they did not have.  While

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the Zuniga court found the seven-day period substantively unconscionable because it is so short, the Tennessee court declined to follow non-binding precedent.  As to the account number, given that the Roberts claim that they did not even know of the arbitration clause, their lack of an account number was irrelevant.  The team represented that it would have honored the opt-out even without such a number.

I find the opinion infuriating, in part because it treats four-point font as notice and in part because unconscionability relates to formation.  A contract that provides for an opt-out but requires an account number that the team does not actually provide is unconscionable at the time of formation.  It is of no matter that the team later proffers self-serving assurances that it would not stand by the terms of its unconscionable arbitration provision.  

In the case discussed in yesterday's post, Arbogast v. Chicago Cubs Baseball Club, LLC, the court held a summary hearing into arbitrability.  Such a hearing could have been useful in this case.  A judge ought to want to hear from the parties about what was going on during those seven days.  Were the plaintiffs not actively exploring their legal options based on conversations or assurances that the team had given in discussions with Mr. Roberts about Ms. Roberts' injury? If I were not a contracts professor and my spouse were hospitalized for three days with facial injuries, my first instinct would not be to try to decipher the four-point font on the back of her ticket stub.  But perhaps I am not the "reasonable and objective observer" that the court is looking for.

As usual, I say all this without quite grasping why plaintiffs prefer litigation over arbitration.  In Arbogast, the arbitration was to take place in New York.  If the same is true in this case, that might be a reason to opt out. But I would think such a remote venue would also be a basis for a claim of substantive unconscionability, so perhaps this arbitration clause allowed for arbitration in Tennessee.