Commercial v. Consumer arbitration clauses

Divalerio v. Best Care Laboratory, LLC, 2021 U.S. Dist. LEXIS 194896 (D.N.J. October 8, 2021)(Wolfson, Chief Judge), is a reminder that commercial and consumer arbitration cases need to be viewed differently.  The case arises from a dispute related to a blood testing business. The Plaintiff and the corporate defendant (“BCL”) entered into three agreements – a Marketing and Sales Contractor Agreement (“IPA”) under which Divalerio acted as a salesperson; a Membership Purchase Agreement (“MPA”), which dealt with plaintiff’s potential ownership interest in the entity; and a promissory note reflecting a $300,000 loan from plaintiff to BCL.  Divalerio claimed that defendants breached those agreements by failing to pay him commissions due under the IPA, refusing to sell him ownership shares under terms of the MPA, and not paying interest on the loan.  He also brought claims that, despite the IPA’s designating him as an independent contractor, he was an employee entitled to relief under New Jersey’s Wage Payment and Sales Representatives’ Rights acts.

The MPA contained a fairly standard arbitration clause, which covered “any dispute, controversy or claim arising out of or in connection with this Agreement or any breach or alleged breach hereof. . . .”  (Emphasis added). Applying New Jersey law, the court holds that plaintiff’s statutory claims are outside the scope of the arbitration clause, as a provision providing for arbitration of claims “under this Agreement” does not extend to the resolution of extra-contractual violations.  Thus, the case reminds us that drafters who wish to sweep all potential claims between the contract’s parties into arbitration need to use broad language such as “all disputes between the parties,” rather than limiting the clause to disputes under the specific agreement.

The more general applicability of the case arises from its consideration of the different standards for determining contract formation in commercial and consumer transactions. In Altalese v. U.S., 219 N.J. 430 (2014), the New Jersey Supreme Court held that an arbitration clause was unenforceable because it did not explain to the plaintiff that she was waiving her right to seek relief in court. Divalerio contended that, similarly, the arbitration clause in his MPA (which the court holds also applies to the IPA) is invalid as it failed to contain that warning. Chief Judge Wolfson rejects the argument, holding that Altalese is limited to consumer, not commercial contracts. She first looks to the language of the Altalese opinion which refers on several occasions to “consumers” and “consumer contracts.” Further, she finds that a party to a commercial transaction differs significantly from a routine consumer. “In comparison to everyday consumers signing contracts with corporate entities, Plaintiff was in a far more equal bargaining position to BCL.”  The lesson – in reading and applying precedent on contract formation, counsel needs to pay close attention to the nature of the parties’ relationship, just as they do on issues of unconscionability.

Browsewrap clauses

Browsewrap is the process by which a consumer using a website becomes bound by an arbitration mandate, even though he or she has not specifically indicated consent to that provision. The concept underlying the doctrine is that the website user has notice that entering into a transaction on the site will invoke the arbitration provision.  That notice can either be “actual,” because the consumer sees the arbitration clause itself (so-called “clickwrap” notice), or “inquiry notice,” under which the website would induce a “reasonably prudent” user to take actions necessary to determine the existence of an arbitration obligation.  Thus, the main issue in inquiry notice cases is whether the arbitration clause was prominent  enough to create such notice.  Foster v. Walmart, Inc., 2021 U.S. App. LEXIS 30216 (8^th Cir. October 8, 2021), addresses the elements of proof to establish that the consumer has been placed under such a duty to inquire.

While most browsewrap cases arise through disputes related to website transactions, Foster grows out of Walmart’s gift cards.  Plaintiffs allege that their gift cards were worthless, because third parties had tampered with them and removed all the value. When Walmart allegedly refused to give refunds, this action ensued.  Defendant moved to compel arbitration, relying upon a provision on the back of the gift card directing purchasers to “[s]ee Walmart.com for complete terms.”  The website, in turn, set forth an arbitration provision which Walmart claimed plaintiffs triggered by their accessing the site. The District Court denied the motion to compel, holding that inquiry notice was absent.  The Eighth Circuit, with Circuit Judge Stras writing for himself, Chief Judge Smith and Circuit Judge Wollman, reverses, opining that the “district court got ahead of itself, when it concluded on this ‘meager record[],’ that inquiry notice was absent.”   The record, the panel finds, was deficient in at least two ways. First, there is an unresolved factual dispute as to whether the plaintiffs accessed the website or if only their counsel, in preparation of the case, hit the link. Second, the record is unclear about the structure of the website itself.  The panel holds that among the “yet-unanswerable questions” are the exact location and prominence of the “terms-of-use” hyperlink, how many clicks it would take to reach the arbitration clause, and whether the website was changed between the time that the plaintiffs obtained their cards and the date of the District Court hearing.  Likewise, the panel holds that the record must be fleshed out as to the nature of the disclosures on the gift cards themselves, such as the size of the disclosures thereon.  In light of these questions and the District Court’s failure to make a choice-of-law determination, the Circuit reverses and remands.

SCOTUS and Section 1782

With the withdrawal of Servotronics, it appeared that the important issue of whether the right to obtain evidence under 28 U.S.C. § 1782 for use in a foreign “tribunal” applies to private, foreign commercial arbitrations would remain as a Circuit split. However, a new petition for cert. attempts to revive SCOTUS’s attention on the question. In ZF Automotive, Inc. v. Luxshare, Ltd., Dkt. No. 21-401, Petitioners take the unusual step of seeking certiorari to the Sixth Circuit before that court renders a decision, see 28 U.S.C. § 1254(1), arguing that this case is “substantively identical to the question presented in Servotronics, Inc. v. Rolls-Royce PLC, No. 20-794.”  However, petitioners contend that this case, unlike Servotronics, will not have the “procedural hurdle” of potentially being mooted.  Therefore, they claim that the case “presents an ideal vehicle by which the Court could resolve the longstanding circuit split and determine – once and for all – what Section 1782 means.” The text of the petition reiterates the importance of the Servotronics question; the appendices are useful to those unfamiliar with the Section 1782 issue, as they contain lengthy opinions from both Magistrate Judge Patti and District Judge Michelson which discuss the issues involved.  The petition is available on Scotusblog.com.  As an arbitration nerd, I hope the Supreme Court takes the opportunity to give us closure on this long-running Circuit split, in whatever way it may resolve the merits.  The fortuity of a witness’s location should make no difference on issues related to discovery in the high-stakes world of international arbitration.

In other SCOTUS arbitration news, the Justices have requested the views of the Solicitor General in Robertson v. Intratek Computer, Inc., Dkt. No. 20-1229, which raises the issue of whether Whistleblower claims under 42 U.S.C. § 4712 may be made subject to mandatory arbitration.

It is good to be back in a writing mode.  I hope you will still find Highlights to be a useful part of your arbitration reading.  See you Friday – I hope.