Page 10 - Litigation

S10 | MONDAY, JULY 17, 2017 | Litigation
| NYLJ.COM
We Have an Arbitration Agreement.
Now What?
Be mindful of key issues with enforcing consumer arbitration agreements.
motion an affidavit about the arbitration pro- vision). See, e.g., Nicosia v. Amazon.com, 834 F.3d 220, 231 (2d Cir. 2016); Guidotti v. Legal Helpers Debt Resolution, 716 F.3d 764, 774-76 (3d Cir. 2013). Where, however, the consumer alleges, for example, that he or she did not receive the arbitration provision or took steps to opt out of its terms then discovery into the facts surrounding formation of the agreement may be necessary before the company can bring a motion to compel arbitration. See, e.g., Hines v. Overstock.com, 380 Fed. Appx. 22, 24 (2d Cir. 2010) (applying Rule 56 to determine motion to compel arbitration).
Which State’s Laws Apply to the Ques- tion of Contract Formation? An additional key consideration at the outset is which state’s laws apply to the question of contract formation.
The Federal Arbitration Act (FAA) applies not only to the enforcement of arbitration agreements but also to the formation of such agreements. See Kindred Nursing Ctrs. L.P. v. Clark, 137 S. Ct. 1421, 1428 (2017) (“By its terms, then, the [FAA] cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’—that is, about what it takes to enter into them.”). Under the FAA, federal courts generally look to the relevant state law on the formation of contracts to determine whether there is a valid arbitration agreement. See First Options of Chi. v. Kaplan, 514 U.S. 938, 944 (1995). Where the consumer class action is styled as a diversity action, the court will have to undertake a choice of law analysis to deter- mine which state’s laws apply. Depending on the particulars of the case and the arbitration provision, there could be an important dis- tinction in the forum state’s laws and the laws of the competing state whereby the choice of law analysis could significantly alter the outcome of the motion. For example, some states have developed a low threshold for what constitutes constructive notice while others set the bar much higher. Compare Hill v. Gateway 2000, 105 F.3d 1147, 1148-49 (7th Cir. 1997) with Norcia v. Samsung Telecomms. Am., 845 F.3d 1279, 1289-90 (9th Cir. 2017). Accordingly, when conducting the choice of law analysis, rather than comparing the formulaic rules of contract formation among the competing states’ laws, it is critical to examine how each state has addressed the specific issues that the particular arbitration provision presents.
The Validity of the Agreement
The next step is to consider whether a valid agreement to arbitrate exists by assess- ing whether the consumer had notice of the arbitration provision and agreed to its terms.
Did the Consumer Have Notice of the Arbitration Provision? The critical question when seeking to enforce a consumer arbitra- tion provision is whether the company pro- vided notice of its terms to the consumer. Indeed, if the consumer did not have notice of the arbitration provision, then he or she could not have consented to its terms and a valid agreement to arbitrate (and waive any class action claims) would not have been formed.
Notice can take two forms: actual notice and constructive notice. In most cases, the consumer will claim to lack actual notice of
BY MARK SPATZ, MATTHEW V. POVOLNY AND NICOLE PASCHAL
The U.S. Supreme Court, in recent years, has provided companies with a powerful tool to avoid class action lawsuits: arbi- tration. In a series of decisions, the Supreme Court has held that class action waivers in otherwise valid arbitration agreements are themselves enforceable. See Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2312 (2013); AT&T Mobility v. Concepcion, 563 U.S. 333, 352(2011). Accordingly, many companies have woven arbitration clauses with class action waivers into their websites’ terms of use, warranties, and other consumer agree- ments with the hope that such arbitration clauses would void any efforts by consumers to file class action lawsuits.
On the surface, enforcing an arbitration clause appears to be fairly straightforward: A
MARK SPATZ is a partner, MATTHEW V. POVOLNY is counsel and NICOLE PASCHAL is an associate at Cohen & Gresser.
company would need to show that the parties have agreed to arbitration and the dispute at issue falls within the scope of the agree- ment. See, e.g., Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 160 (3d Cir. 2009); Combined Energies v. CCI, 514 F.3d 168, 171 (1st Cir. 2008); Cap Gemini Ernst & Young, U.S. v. Nackel, 346 F.3d 360, 365 (2d Cir. 2003).
If only it were so easy. (Indeed, the enforce- ability of an arbitration provision in the terms and conditions provided to consumers by Uber Technologies is currently pending before the Second Circuit in Meyer v. Kalanick, No. 16-2750.) Because the terms of consumer arbi- tration agreements are generally not nego- tiable and the agreements themselves are not formed through the typical means of offer and acceptance, courts take great care in analyz- ing whether an arbitration provision should be enforced against a consumer. Among other things, a court will examine whether: the consumer was on notice of the arbitration provision, the consumer agreed to its terms, and the terms are fair to the consumer. As discussed below, some of these and other issues are easily addressed, while others can be thornier. Regardless, a company should be mindful of these issues when seeking to
enforce the arbitration provision it offers to consumers with its products.
Preliminary Issues
Before addressing the arbitration provision itself, the company will need to consider a few preliminary issues. First, the company may need discovery regarding the facts and circumstances surrounding the formation of the agreement to arbitrate. Second, in a diversity action, the company should carefully consider which state’s laws will apply to the question of contract formation because varia- tions in state law could affect the outcome.
Is Discovery Necessary? At the outset, the company should consider whether it will need any discovery before filing its motion to com- pel arbitration. Generally, the primary issue on a motion to compel arbitration is whether the consumer had constructive notice of the arbitration provision. Accordingly, when it is apparent on the face of the complaint and documents relied upon therein that the plain- tiff received and did not reject the arbitration provision, the issues on a motion to compel arbitration can be decided without discovery (but, it may be necessary to submit with the
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