Second Circ. Holds Arbitration Provision in Uber App’s Terms of Service Created Valid Agreement to Arbitrate

By Michael S. Oberman

Oberman
By opinion issued August 17 in Meyer v. Uber Technologies, the Second Circuit reversed a district court denial of a petition to compel arbitration and held that the arbitration provision within Uber’s terms of service as presented in Uber’s app interface resulted in a valid agreement to arbitrate.

Finding that New York and California law was essentially the same on contract formation but applying California law, the Second Circuit stated (at 21) that “we may determine that an agreement to arbitrate exists where the notice of the arbitration provision was reasonably conspicuous and manifestation of assent unambiguous as a matter of law.”

The court found reasonably conspicuous notice on these bases (at 24-26):

Accordingly, when considering the perspective of a reasonable smartphone user, we need not presume that the user has never before encountered an app or entered into a contract using a smartphone. Moreover, a reasonably prudent smartphone user knows that text that is highlighted in blue and underlined is hyperlinked to another webpage where additional information will be found.

Turning to the interface at issue in this case, we conclude that the design of the screen and language used render the notice provided reasonable as a matter of California law. The Payment Screen is uncluttered, with only fields for the user to enter his or her credit card details, buttons to register for a user account or to connect the userʹs pre‐existing PayPal account or Google Wallet to the Uber account, and the warning that ʺBy creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.ʺ The text, including the hyperlinks to the Terms and Conditions and Privacy Policy, appears directly below the buttons for registration. The entire screen is visible at once, and the user does not need to scroll beyond what is immediately visible to find notice of the Terms of Service. Although the sentence is in a small font, the dark print contrasts with the bright white background, and the hyperlinks are in blue and underlined. This presentation differs sharply from the screen we considered in Nicosia, which contained, among other things, summaries of the userʹs purchase and delivery information, ʺbetween fifteen and twenty‐five links,ʺ ʺtext . . . in at least four font sizes and six colors,ʺ and several buttons and advertisements. Nicosia, 834 F.3d at 236‐37. Furthermore, the notice of the terms and conditions in Nicosia was ʺnot directly adjacentʺ to the button intended to manifest assent to the terms, unlike the text and button at issue here. Id. at 236.

In addition to being spatially coupled with the mechanism for manifesting assent ‐‐ i.e., the register button ‐‐ the notice is temporally coupled… Here, notice of the Terms of Service is provided simultaneously to enrollment, thereby connecting the contractual terms to the services to which they apply. We think that a reasonably prudent smartphone user would understand that the terms were connected to the creation of a user account.

That the Terms of Service were available only by hyperlink does not preclude a determination of reasonable notice…. Moreover, the language ʺ[b]y creating an Uber account, you agreeʺ is a clear prompt directing users to read the Terms and Conditions and signaling that their acceptance of the benefit of registration would be subject to contractual terms. As long as the hyperlinked text was itself reasonably conspicuous ‐‐ and we conclude that it was ‐‐ a reasonably prudent smartphone user would have constructive notice of the terms. While it may be the case that many users will not bother reading the additional terms, that is the choice the user makes; the user is still on inquiry notice.

The Court further held (at 27), expressly reversing the district court, that although the terms were lengthy and must be reached by a hyperlink, the arbitration clause was not unreasonably hidden. “Once a user clicks through to the Terms of Service, the section heading (‘Dispute Resolution’) and the sentence waiving the user’s right to a jury trial on relevant claims are both bolded.”

Finally, the Court found manifestation of assent given the objectively reasonable notice and the user’s election to click on the registration button. “The fact that clicking the register button has two functions—creation of a user account and assent to the Terms of Service—does not render Meyer’s assent ambiguous.” (At 29). The Court added (at 30): “The transactional context of the partiesʹ dealings reinforces our conclusion. Meyer located and downloaded the Uber App, signed up for an account, and entered his credit card information with the intention of entering into a forward‐looking relationship with Uber. The registration process clearly contemplated some sort of continuing relationship between the putative user and Uber, one that would require some terms and conditions, and the Payment Screen provided clear notice that there were terms that governed that relationship.”

In sum, the Court applied traditional contract principles to smartphone technology, and placed heavy emphasis on Uber’s screen design—the clarity of the hyperlink to the Terms of Service and, within the Terms of Service, the bolding of the Dispute Resolution heading. This reasonable disclosure, coupled with the user’s intent to create an account with Uber, proved sufficient for an agreement to arbitrate. In distinguishing the present case from the Court’s own recent opinion in Nicosia, the Court has provided some specific guidance on the graphic features that can separate a binding agreement from an unenforceable agreement in the smartphone era.

Mr. Oberman heads up Kramer Levin’s Alternative Dispute Resolution Practice Group. A fellow of the College of Commercial Arbitration, he serves as an arbitrator and a mediator, in addition to representing parties in ADR proceedings. He can be reached at moberman@kramerlevin.com.

U.S. Court of Appeals Upholds Trial Court’s Sanctions Against Attorney for Frivolous Arguments Seeking to Avoid Arbitration Agreement

By Mark Kantor

The US Court of Appeals for the Seventh Circuit, in Appeal of Jana Yocum Rine in Hunt v. Moore Brothers, No. 16-2055 (June 27, 2017), recently upheld sanctions imposed by the trial court against an attorney personally for her frivolous arguments seeking to avoid an arbitration agreement in a contract between an independent trucker and a trucking company.  The appellate opinion is available at http://cases.justia.com/federal/appellate-courts/ca7/16-2055/16-2055-2017-06-29.pdf?ts=1498759242.

Very briefly, the trial court had required Ms. Rine, counsel for Mr. Hunt, to pay $7,500 in legal fees and expenses incurred by Moore Brothers defending against frivolous claims in a complaint filed by Ms. Rine in District Court and frivolous arguments that the arbitration agreement in the contract between Hunt and Moore Brothers was unenforceable, including a claim that the trucking company was holding Hunt “in peonage.”

James Hunt worked as a truck driver in Nebraska. On July 1, 2010, he signed an Independent Contractor Operating Agreement with Moore Brothers, a small company located in Norfolk, Nebraska.  Three years later, Hunt and Moore renewed the Agreement.  Before the second term expired, however, relations between the parties soured.  Hunt hired Attorney Jana Yocum Rine to sue Moore on his behalf.  She did so in federal court, raising a wide variety of claims, but paying little heed to the fact that the Agreements contained arbitration clauses.  Rine resisted arbitration, primarily on the theory that the clause was unenforceable as a matter of Nebraska law.  Tired of what it regarded as a flood of frivolous arguments and motions, the district court granted Moore’s motion for sanctions under 28 U.S.C. § 1927 and ordered Rine to pay Moore about $7,500.  The court later dismissed the entire action without prejudice.

****

The relevant part of the arbitration clauses in the Agreements reads as follows:

This Agreement and any properly adopted Addendum shall constitute the entire Agreement and understanding between us and it shall be interpreted under the laws of the State of Nebraska. … To the extent any disputes arise under this Agreement or its interpretation, we both agree to submit such disputes to final and binding arbitration before any arbitrator mutually agreed upon by both parties.

When Rine decided to take formal action on Hunt’s part, she ignored that language and filed a multi‐count complaint in federal court.  The complaint was notable only for its breadth: it accused Moore of holding Hunt in peonage in violation of 18 U.S.C. § 1581 (a criminal statute), and of violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962; the federal antitrust laws, 15 U.S.C. §§ 1, 4, 14; the Illinois Employee Classification Act, 820 ILCS 185/1 et seq.; and for good measure, the Illinois tort of false representation.

The Court of Appeals, and the District Court before then, concluded that Rine had blown up a simple commercial dispute beyond all rational proportion; “This was a simple commercial dispute between Hunt and Moore, but one would never know that from reading Rine’s complaint.  She blew it up beyond all rational proportion.”

Writing for a unanimous appellate panel, Chief Justice Wood upheld the trial court’s imposition of sanctions against Rine personally as “within the district court’s broad discretion, in light of all the circumstances of this case….”

We have no need to consider whether the sanctions imposed by the district court were also justified under the court’s inherent power.  See Chambers v. NASCO, Inc., 501 U.S. 32, 45–46 (1991).  Nor are we saying that the district court would have erred if it had denied Moore’s sanctions motion.  We hold only that it lay within the district court’s broad discretion, in light of all the circumstances of this case, to impose a calibrated sanction on Rine for her conduct of the litigation, culminating in the objectively baseless motion she filed in opposition to arbitration.  We therefore AFFIRM the district court’s order imposing sanctions.

The judicial decisions in Hunt v. Moore Brothers are yet another illustration of the increasing peril to counsel personally in US Federal courts if the attorney pursues a frivolous “take no prisoners” approach seeking to avoid arbitration.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

Third Circuit Clarifies its Standard on Motions to Compel

By Ugonna Kanu

The Third U.S. Circuit Court of Appeals recently held that a federal district court had erred when it denied an employer’s motion to dismiss a suit before the court had determined the fate of its motion to compel arbitration. The case was Silfee v. Automatic Data Processing Inc.; ERG Staffing Service LLP, No. 16-3725 (3d. Cir. June 13, 2017)(unpublished)(available at http://bit.ly/2rUZpln).

A unanimous Third Circuit panel ruled, in an unpublished decision, that the trial court first must determine the motion to compel arbitration before the motion to dismiss.

The plaintiff in Silfee filed suit against his former employer for violating Pennsylvania law on payroll practices. ERG, a Dickson City, Pa.-based employment agency, filed a motion to compel arbitration “arguing that the arbitration agreement between Silfee and ERG’s payroll vendor precluded Silfee’s suit against ERG,” according to the opinion.

ERG moved to dismiss Silfee’s suit. The district court, however, placed a hold on compelling arbitration, and denied the motion to dismiss the suit.

The Third Circuit panel opinion, written by Circuit Judge Thomas M. Hardiman, of Pittsburgh, distinguished between the case and Guidotti v. Legal Helpers Debt Resolution L.L.C., 716 F.3d 764, 771 (3d Cir. 2013)(available at http://bit.ly/1pXcNnD), in which the Third Circuit held that where it is apparent that a party’s claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered without discovery delay under Federal Rule of Civil Procedure 12(b)(6).

But, where the agreement to arbitrate is unclear, or the plaintiff facing the motion to compel has provided “additional facts sufficient to place the agreement to arbitrate in issue,” then the court may order limited briefing and discovery on the issue of arbitrability, and assess the question under a summary judgment standard of Rule 56, the opinion explained.

Before Guidotti’s application, the panel opinion noted that the FAA provides a gateway test. It says that a trial court must make an inquiry under Federal Arbitration Act Section 4 where there is a motion to compel arbitration.

Section 4, the opinion emphasized, provides that “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.”

Plaintiff Silfee didn’t produce “additional facts sufficient to place the agreement to arbitrate in issue”—the Guidotti standard to get past a motion to dismiss. As a result, the Third Circuit ruled, the court should have applied the Rule 12(b)(6) standard.

While the appeals panel stopped short of dismissing Silfee’s suit and compelling arbitration, it remanded the case to the U.S. District Court with an order to consider the parties’ “competing arguments regarding arbitrability” under ERG’s motion to compel.

The author is a CPR Institute Summer 2017 intern.

DOJ to NLRB: You’re On Your Own in the Supreme Court

CLASS WAIVER/MANDATORY ARBITRATION CASES

By Nicholas Denny

In the clearest illustration so far of the Trump Administration’s evolving hands-off policy toward mandatory arbitration clauses and class action waivers, the U.S. Solicitor General authorized the National Labor Relations Board (NLRB) last week to represent itself in one of three consolidated arbitration cases to be heard by the U.S. Supreme Court this fall.

At the same time, the U.S. Department of Justice, which had been representing the board in NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Supreme Court docket page at http://bit.ly/2kOPxal) until last week, switched sides in the case, filing an amicus brief backing the employer in the matter.

Justice, via the friend-of-the-court briefs, is now advocating against the NLRB, and against its previous position.

The case—along with its companions, Ernst & Young v. Morris, No. 16-300 (Docket page at http://bit.ly/2kLxCEg) and Epic Systems Corp. v. Lewis, No. 16-285 (Docket page at http://bit.ly/2kFVxm6)—asks whether mandatory arbitration clauses as a condition of employment bar individual employees from pursuing work-related claims on a collective or class basis under the National Labor Relations Act (NLRA). Mandatory arbitration clauses are used throughout employment settings and apply to employees regardless of titles or union affiliation; two of the three cases involve white-collar office workers.

The Supreme Court will hear the consolidated cases in the term beginning in October.

The issue in the consolidated cases is whether employers can continue to unilaterally require that employees agree to a mandatory arbitration clause in employment contracts. Often, these clauses are non-negotiable: either employees accept the employer’s terms or the employer finds someone else to hire.

The Supreme Court must decide which of two laws controls: the National Labor Relations Act, 29 U.S.C. § 151, et seq., or the Federal Arbitration Act, at 9 U.S.C. § 1 et seq. Under the NLRA, an employee’s rights to collective bargaining and action are protected. Under the FAA, however, an employment contract that includes a mandatory arbitration clause binds the worker to arbitrate with the employer instead of litigating in court, and is accompanied by a waiver barring the employee from bringing a class-action suit in favor of an individualized process.

As a result, arbitration clauses can deliver a one-two punch: (1) workers arbitrating individually may have less power, because they are not operating as part of a collective whole as contemplated by the NLRA, and (2) a worker may be less likely to find counsel because arbitration awards are perceived to be much smaller than court and class-action outcomes—meaning a lawyer working for a portion of the settlement would be less likely to take the case.

On the other hand, employers contend that mandatory arbitration clauses protect the company and benefit the employee. They argue that arbitration clauses ensure a speedier and more cost-effective conclusion to conflicts: class actions are harder and more costly to fight than arbitrations.

The disagreement over the use of mandatory arbitration clauses has arisen in the political arena, too. While the Obama Administration focused on pro-employee, anti-mandatory arbitration policies that prohibited employers from unilaterally waiving workers’ rights to concerted action under the NLRA, the Trump Administration is leaning toward an employer-centric policy by permitting mandatory arbitration clauses in employment contracts and as a condition of hiring.

This drastic shift in policy culminated with Friday’s news that the NLRB will represent itself, and that the Department of Justice would switch sides. The NLRB, as an autonomous government entity, is tasked with protecting “the right of employees to engage in protected concerted activities—group action to improve wages, benefits, and working conditions and to engage in union activities and support a union,” according to its website, as well as protecting the right of workers to refrain from engaging in protected concerted or union activities.

While the Justice Department prosecutes on behalf of the nation as well as defends government agencies, it is exceedingly rare for it to withdraw its representation of an agency it had been representing and subsequently file a brief in opposition to the position had it previously taken.

The Justice Department amicus brief switching sides in Murphy Oil is available at http://bit.ly/2sUnFbL.  The NLRB’s June 16 announcement that it would represent itself without Justice Department support can be found on the board’s website at http://bit.ly/2traH2s.

The move, however, is consistent with another recent Trump Administration policy shift on arbitration. In early June, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, withdrew a 2016 Obama Administration position prohibiting mandatory arbitration clauses in long-term care nursing home contracts.

CMS’s new position allows arbitration agreements provided that the provisions are written in plain language, and explained to and accepted by the applying resident.  Among other conditions, the CMS requires that the nursing home retain a copy of the signed agreement and post a notice that details the nursing home’s arbitration policy.

In addition, House Republicans introduced the “Financial CHOICE Act” earlier this month, a proposed law that aims to dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank is an extensive law that was passed to ensure higher accountability in the U.S. financial sector after the economic recession of 2008 and it was endorsed by former President Obama.

Among its many goals, Dodd-Frank pointed its then-new Consumer Financial Protection Bureau at pre-dispute mandatory arbitration clauses in consumer finance contracts. A lengthy study concluded last year by the CFPB resulted in a promise to finalize regulations that would ban the use of predispute mandatory arbitration in consumer financial contracts, such as cellphone agreements.

But should the “Financial CHOICE Act” become law, it likely would allow financial institutions to include mandatory arbitration clauses in their consumer contracts and agreements, and negate the CFPB efforts.

President Trump’s stance on mandatory arbitration clauses is becoming clear. Whether the clauses are legal in the employment context, and whether they will withstand Supreme Court scrutiny, are developing issues that are expected to be answered within the year. Watch CPR Speaks for updates.


The author is a CPR Institute Summer 2017 intern.