The Winter 2016 edition of the Hausfeld Competition Bulletin contained an article entitled Mandatory Arbitration In The United States And Europe.(i) In that article, I traced chronologically a series of United States Supreme Court decisions that have effectively stripped plaintiffs (particularly consumers) of their Seventh Amendment right to a jury trial and their Fed. R. Civ. 23 right to pursue relief on a class-wide basis. Specifically, the Supreme Court has repeatedly held that (1) the Federal Arbitration Act (“FAA”) prohibits states (whether via legislation or court decisions) from restricting what can be arbitrated; and (2) the FAA permits companies to restrict how the arbitrator does his or her job by inserting contractual terms that, for example, prohibit representative actions in arbitration. Not surprisingly, this line of Supreme Court decisions has encouraged companies to become ever more aggressive in wielding arbitration as a sword.
Since Mandatory Arbitration was published, federal and state courts have issued a plethora of decisions interpreting and applying Supreme Court arbitration precedent. Except in the area of contract formation (i.e., did the consumer really agree to arbitrate?), the federal courts of appeal have generally enhanced companies’ ability to tailor arbitration to their specific needs. The federal district courts and state courts, by contrast, often continue to look for ways to even what has become a very tilted playing field. This update addresses two areas of United States arbitration jurisprudence in which the battles have been particularly pronounced.
I. Stealth Contracting for Arbitration
Arbitration is a matter of contract, so it can displace the courts only if the plaintiff actually formed an agreement to arbitrate with the defendant. This is a threshold question of state law that is for a court, not the arbitrator, to decide.
As recounted in Mandatory Arbitration, the Supreme Court has blessed so called “agreements” to arbitrate that were never discussed, were difficult to find and that the plaintiff never even reviewed. While the courts have often been quite lax in finding mutual assent, there are limits as demonstrated by two recent court of appeals cases rejecting Samsung’s attempts to engage in so-called “stealth contracting.” See Noble v. Samsung Electronics America, Inc.,[ii] and Norcia v. Samsung Telecommunications America, Inc.[iii] In both cases, Samsung relied on well disguised contract terms in an attempt to compel arbitration of consumer class actions.
In Noble, the plaintiff purchased a Smartwatch that allegedly had a defective battery. Samsung based its Motion to Compel Arbitration on a 3.1 inch by 2.5 inch, 143 page document entitled “Health and Safety and Warranty Guide” that was located inside the product box. Neither the Guide’s Table of Contents nor its Index referenced an agreement to arbitrate, but on page 97 the following language appeared:
"ALL DISPUTES WITH SAMSUNG ARISING IN ANY WAY FROM THIS LIMITED WARRANTY OR THE SALE, CONDITION OR PERFORMANCE OF THE PRODUCTS SHALL BE RESOLVED EXCLUSIVELY THROUGH FINAL AND BINDING ARBITRATION, AND NOT BY A COURT OR JURY.
Any such dispute shall not be combined or consolidated with a dispute involving any other person’s or entity’s product or claim, and specifically, without limitation of the foregoing, shall not under any circumstances proceed as part of a class action."
The purported arbitration agreement continued on for another five pages and concluded with an opt-out option that had to be exercised by giving notice to Samsung within 30 days of the purchase date.
In Norcia, the plaintiff purchased a Galaxy S4 phone allegedly due to Samsung’s misrepresentations about the phone’s storage capacity and operating speed. Samsung based its Motion to Compel Arbitration on a 101 page “Product Safety & Warranty Information” brochure that was located inside the phone’s box. The section of the brochure that contained Samsung’s express warranties included, without warning, the following language:
"All disputes with Samsung arising in any way from this limited warranty or the sale, condition or performance of the products shall be resolved exclusively through final and binding arbitration, and not by a court or jury."
This part of the express warranty section in the 101 page brochure further stated that the purchaser may opt-out of the arbitration provision by providing notice to Samsung within 30 days of the date of purchase.
Both the Third Circuit and the Ninth Circuit acknowledged that silence or inaction can constitute acceptance of a contractual offer in certain situations. However, acceptance could not be implied in either Noble or Norcia because Samsung had not provided reasonable notice of the arbitration provision. A consumer cannot be deemed to have agreed to terms that he had no reason to know about. Hiding the arbitration provisions inside the product warranties was especially problematic because warranties do not constitute bilateral contracts that require consumer consent.
More difficult issues are presented when deciding whether to enforce “agreements” to arbitrate that appear on websites (rather than in prolix documents stuffed into product boxes). These agreements typically come in two varieties. Clickwrap (or click-through) agreements are those where the user is required to click an “I Agree” box that appears after a recitation of the company’s terms and conditions of use. These are generally enforced. Browserwrap agreements, by contrast, don’t require any action. The company’s terms and conditions are generally posted on the website via a hyperlink. The consumer is able to use the website and conduct business without even knowing that defined terms and conditions (including mandatory arbitration) govern the transaction. Browserwrap agreements are much harder to enforce against consumers. The party advocating arbitration must show that the consumer had actual or constructive knowledge of the contractual provision and manifested his or her assent to it.
Two 2017 district court cases illustrate the fine line between an enforceable internet arbitration agreement and unenforceable “stealth contracting.” In DeVries v. Experian Information Services, Inc.,[iv] Judge Orrick of the Northern District of California compelled arbitration of a consumer class action even though the company’s Terms and Conditions did not appear directly on the web site. The consumer had to click on a hyperlink to read them. However, the consumer could not complete a transaction without clicking a button that appeared below the following language:
"Click “Submit Secure Order” to accept the Terms and Conditions above, acknowledge receipt of our Privacy Notice and agree to its terms, confirm your authorization for ConsumerInfo.com, Inc., an Experian company, to obtain your credit report and submit your secure order."
Judge Orrick concluded that the quoted language provided the consumer with reasonably conspicuous notice that specific terms and conditions existed. Indeed, the consumer had to click on a button agreeing to the terms and conditions in order to conclude a transaction. It did not matter that the consumer chose not to click the hyperlink and review those provisions before accepting them. Judge Orrick therefore enforced the arbitration provision which included a class action waiver.
So, did Uber’s electronic agreement satisfy the reasonably conspicuous notice standard? Judge Rakoff, after characterizing his inquiry as highly fact intensive, concluded that it did not. More obvious notice is required before inferring that Uber and its users had a meeting of the minds on arbitration.
Other courts have enforced Uber’s passenger contract and Judge Rakoff’s decision is on interlocutory appeal to the Second Circuit. Only time will tell whether his findings and conclusions will be upheld. Whatever the outcome, Judge Rakoff provided a valuable service by highlighting what is at stake. As he noted at the beginning of his opinion, the constitutional right to a jury trial is “precious and fundamental” and can be waived “only if the waiver is knowing and voluntary, with the courts ‘indulging every reasonable presumption against waiver.’”[vi]
II. Arbitrability—“Which Is To Be Master?”
In Lewis Carroll’s classic novel, Through The Looking Glass, Alice and Humpty Dumpty have the following exchange:
"When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean – neither more nor less.
The question is,’ said Alice, ‘whether you can make words mean so many different things.’
The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all."
The notion that who decides a question is more significant than the objectively correct answer is deeply cynical. However, a 2016 Third Circuit decision on whether the courts or an arbitrator should decide the bounds of arbitrability suggests that Humpty Dumpty might have been a sage observer of how the world actually works. In Chesapeake Appalachia, LLC v. Scout Petroleum, LLC,[vii] the Third Circuit confronted a factual and procedural history that, in Lewis Carroll’s words, continually got “curiouser and curiouser.” The case stemmed from a series of oil and gas leases that Chesapeake had entered into with numerous landowners. Each lease contained a provision which stated that all disputes “shall be determined by arbitration in accordance with the rules of the American Arbitration Association.”
When a dispute arose over the payment of royalties, Scout did what it was supposed to do and filed an arbitration demand with AAA. The demand was on behalf of itself and similarly situated lessors. In a 2010 decision, the Supreme Court held that arbitration on a class-wide basis can occur only if the parties authorize it in their contract.[viii] So Scout asserted such authorization had occurred. The parties’ arbitration provision expressly incorporated AAA rules, and AAA Supplementary Rule 1 authorizes class action proceedings. Chesapeake objected, relying on the fact that arbitration provision did not expressly mention class-wide relief.
The arbitration panel followed established AAA precedent to rule that it (rather than the courts) had the authority to resolve the parties’ conflicting interpretations of their arbitration contract. Chesapeake immediately asked a federal court to vacate the arbitrators’ decision on who was to decide. In ruling for Chesapeake, the Third Circuit initially cited a prior decision holding that “class arbitrability constitutes a gateway question for the courts to decide unless there is a clear agreement to the contrary.” [ix] The court then held that the incorporation of AAA rules is not enough to constitute the required “clear agreement to the contrary.” The Third Circuit made this ruling even though it acknowledged that Scout’s interpretation of the arbitration provision was perfectly reasonable. The court also acknowledged that “virtually every circuit to have considered the issue has determined that the incorporation of the [AAA] arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”[x] However, neither was enough to overcome the presumption against relinquishing judicial power. In other words, a tie goes to the courts and against the arbitrators.
Readers of Mandatory Arbitration likely will find this result puzzling. Doesn’t the recent line of Supreme Court decisions interpreting the FAA exhort the lower courts to trust arbitrators? What’s different here? While the Third Circuit did not expressly say so, the Supreme Court’s oft-stated skepticism of class-wide proceedings in arbitration appears to have played a role. If the Third Circuit did not take the question away from the arbitrators, they might have actually applied AAA Supplementary Rule 1 and allowed a class-wide proceeding. This apparent difference between the courts’ and the arbitrators’ respective views of wisdom of class-wide arbitration appears to have driven the decision about who should decide. As Humpty Dumpty so eloquently put it, “The question is . . . which is to be master—that is all.”
Chesapeake’s litigation position was bolstered substantially by the fact that the arbitration provision it drafted did not expressly delegate arbitrability decisions to the arbitrators. What happens when that occurs? The Ninth Circuit addressed this question in Mohammed v. Uber Technologies, Inc.[xi] The case addressed the enforceability of Uber’s carefully crafted driver arbitration provision which stated, in pertinent part:
"Except as it otherwise provides, this Arbitration Provision is intended to apply to the resolution of disputes that otherwise would be resolved in a court of law or before a forum other than arbitration. This Arbitration Provision requires all such disputes to be resolved only by an arbitrator through final and binding arbitration. And not by way of court or jury trial.
Such disputes include without limitation disputes arising out of or relating to interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision."
The district court held that this so-called Delegation Clause was ambiguous (and hence was not a “clear and unmistakable” delegation of decision making) because another section of Uber’s contract with its drivers stated that the state or federal courts in San Francisco shall have “exclusive jurisdiction” over any disputes that arise out of, or in connection with, the contract. The Ninth Circuit rejected the conflict between these provisions as “artificial.” The tie this time went in favor of the arbitrators.
The Ninth Circuit also rejected the district court’s finding that Uber’s delegation provision was unconscionable. Uber’s contract allowed its drivers to opt-out of the arbitration provision by sending a notice via overnight mail within thirty days. Longstanding Ninth Circuit precedent, interpreting California law, holds that an opt-out provision renders a contract non-adhesive and hence not unconscionable. The district court concluded that the opt-out provision was illusory because it was too difficult to exercise. The Ninth Circuit disagreed, holding that overnight mail was not a burdensome requirement as evidenced by the fact that many drivers had successfully accomplished this task and opted out.
The Mohammed case was filed as a class action. So, as with the Chesapeake case, doesn’t upholding a delegation clause raise the specter of a class-wide arbitration administered by out of control arbitrators? The answer this time was no because Uber, unlike Chesapeake, was careful to include in its contract a waiver of class, collective and representative actions.
Contract formation and arbitrability are just two of the areas where the lower courts struggle to comply with (or evade) the Supreme Court’s strong rulings in favor of arbitration. An equally significant area is the enforceability of arbitration provisions that arguably conflict with federal laws or with state laws of general application. Since Mandatory Arbitration was published, both the Ninth Circuit[xii] and the California Supreme Court[xiii] have cited perceived conflicts as grounds for refusing to order arbitration of lawsuits filed as class, collective and/or representative actions. My next update will explore these and similar decisions.