No black cats or ladders on this Friday the 13^th, but some interesting cases, including input from the Fifth and Seventh Circuits.

Conflicting (?) arbitration and choice of forum clauses

Fintech Fund, F.L.P. v. Horne, 2020 U.S. App. LEXIS 35418 (5^th Cir.) (Nov. 10, 2020) addresses how a court may reconcile potentially dueling arbitration and forum selection clauses.  Fintech licensed its biometric technology to its U.K. affiliate, CrossVerify.  Horne, the defendant here, was the former CEO of CrossVerify.  Fintech alleges that Horne used his position to download confidential information and sued him under various trade secret statutes.  While the issue before the Court of Appeals was whether the litigation should be dismissed either for lack of personal jurisdiction or under the doctrine of forum non conveniens, the court’s analysis required reconciliation of three portions of the parties’ contract.  In Section 12(A) thereof, the parties agreed to a broad arbitration clause, covering essentially all disputes “except for any claims against [Fintech].” In Section 14, they agreed that “each party irrevocably agrees that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims), except as to claims against [Fintech].”  In Section 12(D), they agreed that, if “the provisions for arbitration are invalidated or deemed unenforceable,” the case would be tried in Houston. Fintech argued that the conflict between Sections 12(A) and 14 meant that the two canceled each other out; that Section 14(D), therefore, became operative; and that Houston must be the venue for trial.

The Court of Appeals, Owen, C.J., for a panel including Circuit Judges Jones and Stewart, applied English law, which the parties chose under their choice of laws provision. It interprets that law to require courts to “make every attempt to harmonize contractual provisions and . . . determine that two provisions are irreconcilable only as a ‘last resort.’” The court reconciles Section 12(A) and 14 by holding that the latter is only designed to provide a backup to deal with supervisory issues, such as filling a vacancy on the arbitral tribunal if there is no other provision for doing so or removing an arbitrator for misconduct.  Thus, the court finds that there is no conflict between those provisions.  As a result, both sections remain enforceable and there is no need to exercise the “rescue” position provided by Section 12(D), automatically placing the case in Texas.  The Court of Appeals affirms the District Court’s dismissal of the case in favor of the Courts of England and Wales.

In a routine analysis, the court goes on to hold that the dispute between the parties is within the scope of the arbitration clause.

While the case applies English law, the underlying principle applies in the U.S.  Where a contract appears to have conflicting terms, a court must try to reconcile the two.  In the context of arbitration, Fintech opines, this is done by limiting the scope of disputes invested in the judiciary, leaving the heavy lifting to the arbitration.  Thus, both provisions serve a purpose.

Execution of an arbitration clause by an agent

Did you know that the person who set up your cell phone in the neighborhood T-Mobile store was your agent and was authorized to bind you to arbitration? In Velasquez-Reyes v. Samsung Electronics America, Inc., 2020 U.S. Dist. LEXIS 209802 (C.D. Cal.) (Oct. 20, 2020), Judge Gee imbues him or her with that authority.

Plaintiff had purchased two Samsung phones on eBay and took them to a T-Mobile store for activation. The set-up process involved a click wrap agreement requiring that any dispute with Samsung must be resolved through arbitration. However, Plaintiff apparently never knew that fact; the case is clear that “The T-Mobile representative did not say anything to [Plaintiff] about the arbitration agreement contained in the Samsung terms and conditions” nor did he tell the plaintiff that there were any documents he should read. The two phones were damaged when one was dropped into the ocean and the other fell prey to tap water.  Plaintiff brought suit against Samsung, claiming that it misrepresented that the equipment was water resistant. Samsung sought to impose the arbitration clause to resolve the dispute.  Judge Gee, in compelling arbitration, holds that, under California law, once plaintiff asked the sales representative to activate the phone on his behalf, the representative became plaintiff’s agent.  The court holds that the agency relationship extends to all the acts performed by the sales representative, including agreeing to arbitration by clicking a “next” button during set up, even though the plaintiff had no actual knowledge as to the effects of those actions. “That [plaintiff] authorized the T-Mobile representative to click through this page for him does not mean he did not have reasonable inquiry notice as to its contents.”

I will leave it to the reader to decide whether the court is correct in her analysis. But, generally, when one designates an agent to act on his or her behalf, the designating party has some understanding as to what he is empowering the agent to do.  I suspect that if any of us were asked what the sales representative was doing while fiddling with our new phone, we would answer that he or she was undertaking some technical and electronic wizardry. Would any of us really believe that he or she was also deciding whether to bind us to a contract?

An interesting sidelight to the case is its discussion of the difference between a click wrap and a shrink wrap agreement, an analysis which arises by virtue of an earlier decision involving a different plaintiff in the same case.

401(k) beneficiaries and FINRA

Phyllis Frank (the real plaintiff in interest in this case) was the mother of a UBS employee and, at one time, the beneficiary of a UBS 401(k) plan and life insurance policy in her late son Erich’s name. Prior to his death, Erich changed the beneficiary of both products from his mother to his partner. Tuchman v. UBS Financial Services, Inc. 2020 U.S. Dist. LEXIS 210735 (S.D.N.Y.) (Nov. 9, 2020) arises from Ms. Frank’s attempt to compel arbitration under the FINRA rules in an effort to require UBS to pay her those benefits. (Tuchman, the named plaintiff, acted for Mrs. Frank under a power of attorney).

Arbitration under the FINRA Code is appropriate, in relevant part, where it is required by a written agreement, requested by a “customer,” or relates to a dispute between a “customer” and a member.  The court, Freeman, Magistrate Judge, holds that Ms. Frank falls into none of those categories.  First, it is undisputed that she had not executed a written agreement UBS – all contracts were solely between her son and the Defendant.  Nor, the court holds, was she a third-party beneficiary of her son’s agreement.  Under New York law, in order to create a third-party beneficiary relationship, the contracting parties must demonstrate an obvious intent to confer those benefits upon one who is not a party to the agreement.  Here, the court finds no evidence of such intent in the written documents or elsewhere.  To the contrary, the court opines, the arbitration provision provides that “You agree” that dispute shall be arbitrated. (Emphasis added) “You,” in turn, is defined to mean “Client(s) of UBS.”  Since Ms. Frank was not a signatory to the agreement, she never became a “client of UBS, does not fall under the definition of “You,” and, therefore, had no right to compel arbitration. The court distinguishes an out-of-Circuit case, Hargen-Rodriguez v. UBS Trust Co of Puerto Rico, 2017 WL 2937592 (D.P.R.) (July 7, 2017), in which the court held that the beneficiaries of a trust of which UBS was the trustee had standing to compel arbitration.  There, per the court, UBS, since it was acting as trustee, had a direct relationship with the beneficiaries.  Here, Erich changed the beneficiary of his accounts prior to his death; therefore, a relationship was never established between his mother and UBS.

In holding that Ms. Frank is not a “customer” the court relies upon the “bright line” test established by the Second Circuit in Citigroup Global Markets, Inc. v. Abbar, 761 F. 3d 268 (2^nd Cir. 2014).  Under that holding, the term “customer” under the FINRA rules is limited to someone who “while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.”  Since Ms. Frank had neither made a purchase nor opened an account, she never became a customer.

Waiver of arbitration

There are a lot of cases which deal with the question of whether, through its participation in litigation, a party has waived the right to demand arbitration.  Spark Connected LLC v. Semtech Corp., 2020 U.S. Dist. LEXIS 210373 (E.D. Tex.) (Nov. 10, 2020) is the case for counsel to cite if they decide to arbitrate, despite being up to their knees in pre-trial maneuvering.  This action was brought in October 2018.  Ken Moore, one of the plaintiffs, waited until April 2019, five months after Semtech filed a counterclaim against him, to argue that the allegations contained in that pleading were subject to arbitration. Thereafter, Moore filed an amended answer to the counterclaim, in which he made no reference to a requirement for arbitration.  It was not until August 27, 2019, the day before a Rule 16 management conference, that Moore filed a motion to compel arbitration.  Semtech claimed that, by reason of Moore’s delay in filing that motion, his filing of two dispositive motions, and his participation in a two-day hearing on Semtech’s motion for preliminary injunction, he had waived any right to arbitration of the counterclaim.  In this opinion, the court, Johnson, J., holds that, despite all that activity, Plaintiff did not waive his right to arbitrate.  Therefore, the court grants Moore’s application to sever arbitrable claims and refer them to that forum.

Judge Johnson finds two prerequisites to a waiver of arbitration – substantial invocation of the judicial process and prejudice to the party opposing the motion to compel. The court breaks down each of those elements into its component parts, analyzing the nature of Moore’s participation in the litigation and any potential prejudice to Semtech.  Since the court bases its conclusion on these issues on a deep dive into the facts of the case, you will need to read the opinion to understand how Judge Johnson reaches his finding that there was no waiver.  For our purposes, suffice it to say that the opinion shows how counsel can effectively oppose a waiver claim and provides extensive case citation in support thereof.

Quick hits –

Default in an application to confirm an award

Choice Hotels International, Inc. v. Stillwater Joint Venture, LLC, 2020 U.S. Dist. LEXIS 210687 (D. Md.) (Nov. 10, 2020) reiterates the principle that, despite a party’s failure to appear and oppose an application to confirm an arbitration award, the court must still evaluate the award itself to assure that it meets the standards for confirmation under the FAA.

Sanctions

If you are going to ignore four arbitration awards against you and bring litigation on the same claim, you better be ready to be sanctioned.  So holds Matlin v. Spin Master Corp., 2020 U.S. App. LEXIS 35393 (7^th Cir.) (Nov. 10, 2020).  The Court affirms the District Court’s holding that the issues raised by Matlin were already resolved in arbitration.  It, also, affirms sanctions in the amount of $271,926.92, representing the fees incurred by Spin Master in preparing and filing a motion to dismiss the litigation under the doctrine of collateral estoppel and in drafting the sanctions motion itself.  The case is worth reading both for its analysis of the propriety of sanctions and for the methodology it uses to determine the appropriate amount thereof. The court lays out an interesting test for the reasonableness of fees where the party seeking sanctions has already paid its lawyer – “the best evidence of whether attorney’s fees are reasonable is whether a party has paid them.” (Omitting citation).  I wonder if there are clients who might disagree with that statement.

Have a good weekend. Fall – the rainy, damp part – has hit the Northeast. I hope you have sunshine.

Dave Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com