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District Court: Underlying court judgment does not waive right to compel arbitration
On June 21, the U.S. District Court for the Western District of New York granted defendants’ motion to compel arbitration in an action accusing the defendant of violating the FDCPA by making false statements when attempting to collect outstanding debt. In 2018, the defendant purchased the plaintiff’s charged-off account and a year later filed a lawsuit seeking to collect on the outstanding credit card debt. Default judgment was entered in favor of the defendant, who then attempted to collect on the judgment by filing an income execution to garnish the plaintiff’s wages. The plaintiff filed suit, contending that the income execution contained false statements and failed to comply with various requirements under the New York State Consumer Protection Law. The defendants filed a motion to compel arbitration and to dismiss the complaint based on provisions in a credit card agreement between the plaintiff and the original creditor. The plaintiff argued that the arbitration provisions did not apply because the judgment obtained by the defendant on the underlying debt extinguished the agreement and, as such, “there is no longer an ‘account’ upon which to enforce the arbitration provision.” The court disagreed, noting that if the plaintiff’s assertion that “an underlying court judgment merges with and extinguishes an underlying contractual debt” was correct, “contracts would be rendered meaningless whenever a party breached any portion of an agreement and the other party obtained a judgment on such breach.” Additionally, the court noted that the agreement “expressly permitted parties to file suit without waiving the right to compel arbitration on subsequent claims.” Specifically, the agreement provides that cases filed to collect money owed by a consumer will not be subject to arbitration, but that a response to such a collection suit claiming any wrongdoing may be subject to arbitration. “Thus, regardless of whether an underlying court judgment merges with and extinguishes an underlying contractual debt, the contract itself and its obligations—including the ability to compel the arbitration of subsequent claims—do not similarly merge,” the court wrote.
District Court: Applying Michigan law is contrary to California’s interest in protecting citizens in data breach case
On June 15, the U.S. District Court for the Eastern District of Michigan denied an e-commerce company’s request to compel arbitration after reviewing whether Michigan or California state law applied to class claims concerning a 2019 data breach. After four actions against the company were consolidated and transferred from California court to Michigan, a separate putative class action was filed in the U.S. District Court for the Northern District of California related to the data breach. Members in this putative class action brought claims against the company for allegedly failing to protect California residents’ confidential and personal information from the 2019 data breach. The class sought public injunctive relief under California’s Consumer Records Act (CRA) and Unfair Competition Law, arguing, among other things, that the potential for “future injury to the general public” remains because the company has not changed its practices.
The court initially granted the company’s motion to compel arbitration according to its terms of service and privacy policy, which contained a mandatory arbitration clause as well as a clause requiring parties to apply Michigan law to all claims or disputes. However, because the order applied to the originally amended consolidated class action complaint that did not include the newest California putative class action, the court reopened the case in order to determine which state law applied to the California class’s claims. In denying the company’s motion to compel arbitration, the court cited to McGill v. Citibank (covered by a Buckley Special Alert here, which held that a waiver of the plaintiff’s substantive right to seek public injunctive relief is not enforceable) and determined that applying Michigan law is “contrary” to California’s “materially greater interest in protecting its citizens”—particularly because the alleged violations are ongoing. The court rejected the company’s argument that McGill did not apply in this case because the putative class is seeking an injunction that would only benefit a narrow subset of individuals whose data was stolen rather than the general public. According to the court, rejecting the putative class’s claims for this reason would allow the company “to continue engaging in inadequate data protection practices in violation of the Unfair Competition and CRA and leave consumers unable to adjudicate their claims based on those practices on behalf of the public.” The putative class’s proposed 12-point injunction would, among other things, require the company to hire third-party security auditors and implement other reasonable and appropriate security practices and procedures, which would benefit all future customers, not only those harmed in the 2019 data breach, the court stated, adding that the proposed class has “nothing to personally gain from an injunction requiring [the company] to employ safer data practices” because their data was already compromised.
District Court finds that lender did not waive arbitration clause by filing collection lawsuit
On May 19, the U.S. District Court for the Southern District of Texas granted a lender’s motion to compel arbitration in a putative class action debt collection case, ruling that the lender’s collection lawsuit against an individual did not waive the arbitration clause in the underlying promissory note. After the plaintiff borrower defaulted on a personal loan, she received a collection letter from a law firm hired by the creditor, which contained a warning that if payment was not made within 30 days, a recommendation would be made to the creditor to file a lawsuit to collect on the debt. Six days after sending the letter, the creditor filed suit in small claims court to recover the unpaid debt. The plaintiff then filed a separate lawsuit against the creditor and the law firm, alleging violations of the FDCPA and the Texas Debt Collection Act (TDCA). The plaintiff claimed, among other things, that the letter made “false, deceptive, or misleading representations” because the creditor demanded payment within 30 days even though the FDCPA provides borrowers 30 days to dispute a debt after receiving a collection letter. The plaintiff further sought to hold the creditor “vicariously liable [under the TDCA]” for the law firm’s allegedly unlawful collection activities. The defendants moved to compel arbitration, but the plaintiff argued that the arbitration clause in the underlying promissory note was waived when the defendants sued to collect on the unpaid debt. The plaintiff also argued that the law firm hired by the creditor could not compel arbitration because it was not a party to the promissory note. The court disagreed, finding that the creditor’s decision to file a lawsuit for breach of contract in small claims court “should not prevent it from later enforcing its right to arbitrate a completely separate claim.” The court further concluded that the allegations brought against the law firm are “inextricably enmeshed and have a significant relationship to the terms” of the promissory note, and that, as such, the law firm may compel arbitration even though it is a nonsignatory to the agreement.
9th Circuit: Company cannot compel minor children to arbitration
On April 23, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s refusal to compel arbitration against a technology company, concluding that children are not bound by arbitration provisions in their parents’ service contracts with the company. The appeals court held that the plaintiff children, who were not signatories to the service contracts, could not be compelled to arbitration because “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”
In their June 2019 suit in the U.S. District Court for the Western District of Washington, the plaintiffs alleged that one of the corporation’s services caught and documented their communications, in violation of state wiretapping law. The defendant asserted that “the children were bound by arbitration provisions in the service contracts signed by their parents because they directly benefited from the agreements.” In affirming the district court’s decision on appeal, the Ninth Circuit agreed that the doctrine of equitable estoppel did not bind the plaintiff children to arbitrate because they “are not asserting any right or looking to enforce any duty created by the contracts between their parents and the corporation. Instead, plaintiffs bring only state statutory claims that do not depend on their parents’ contracts.”
Court denies lender’s bid to arbitrate DACA suit
On April 12, the U.S. District Court for the Northern District of California denied defendants’ motion to compel arbitration in a matter alleging a lender denied plaintiffs’ applications based on their immigration status. The plaintiffs filed a putative class action against the defendants, alleging the lender denied their loan applications based on one of the plaintiff’s Deferred Action for Childhood Arrivals (DACA) status and the other plaintiff’s status as a conditional permanent resident. The plaintiffs claimed that these practices constituted unlawful discrimination and “alienage discrimination” in violation of federal law and California state law. The plaintiffs also alleged that the lender violated the FCRA by accessing one of their credit reports without a permissible purpose. The defendants moved to compel arbitration and dismiss the claims.
With respect to the defendants’ motion to compel arbitration, the lender claimed that the DACA plaintiff “expressly consented to arbitration” when he was required to check a box labeled “I agree” in order to proceed with his online student loan refinancing application back in 2016. However, the DACA plaintiff argued the arbitration agreement “lacked adequate consideration” because he was ineligible for a loan as a DACA applicant, and that even if it were a valid agreement, it only applied to his 2016 application and not to his subsequent attempts to refinance his student loans. In denying the lender’s motion to compel arbitration, the court concluded that the DACA plaintiff did not claim that he was seeking to reopen or have the lender reconsider his 2016 application, but rather he asserted that these were “standalone attempted transactions,” and as such, did not fall within the scope of the 2016 arbitration agreement.
In reviewing whether the lender’s policies constitute alienage discrimination, the court determined, among other things, that while the lender “asserts that it does not discriminate against non-citizens because some non-citizens—namely [lawful permanent residents] and some visa-holders—are still eligible to contract for credit with [the lender],” the distinction “is not supported by the language of the statute,” noting that under 42 U.S.C. § 1981, protections “extend to ‘all persons within the jurisdiction of the United States.’” Additionally, the court ruled that the second class of conditional permanent residents whose credit reports were pulled by the lender and allegedly experienced a decrease in their credit scores—despite plaintiffs claiming the lender’s policy states that permanent residents are ineligible for loans if their green cards are valid for two years or less—may proceed with their FCRA claims.
11th Circuit: Class members must arbitrate overdraft suits
On April 7, the U.S. Court of Appeals for the Eleventh Circuit upheld a district court’s ruling compelling individual arbitration in five separate putative class action suits concerning allegations that a national bank’s overdraft practices violated the covenant of good faith and fair dealing. The opinion does not address plaintiffs’ claims concerning the bank’s alleged overdraft practices, but rather reviews the enforceability of arbitration clauses contained in account agreements between plaintiffs and the bank (or its predecessor), which require individual, non-class arbitration of consumer account-related disputes. The plaintiffs appealed a ruling by the U.S. District Court for the Southern District of Florida that the account agreements “delegate[] to the arbitrator all questions of arbitrability, including Plaintiffs’ challenge to the enforceability of the arbitration clause,” and that it is up to the arbitrator, and not the court, to determine whether the parties are required to arbitrate. According to the plaintiffs, the arbitration clause is illusory and/or unconscionable and therefore unenforceable. They challenged, among other things, that “the incorporation of the [American Arbitration Association] (AAA) rules cannot overcome the plain language of the delegation clause,” which the plaintiffs argued limited delegation of gateway issues to those related to a disagreement about the meaning of the arbitration agreement or whether a disagreement is a “dispute” subject to binding arbitration.”
The appellate court disagreed, concluding that nothing in the account agreement with the bank “explicitly excludes or contradicts” anything included in the AAA rules, and that it has repeatedly held that an agreement that incorporates “AAA rules with language providing that ‘the arbitrator shall have the power to rule on his or her own jurisdiction,’” shows “a clear and unmistakable intent that the arbitrator should decide all questions of arbitrability.” Moreover, the 11th Circuit found no inconsistency in the account agreement’s language, holding that when “[r]ead together, we view the incorporation and delegation clause as ‘mutually reinforcing methods of delegation.’” With respect to the predecessor bank’s agreement, which does not contain a delegation provision, the appellate court ultimately determined that the arbitration clause was neither illusory and/or unconscionable.
11th Circuit: Arbitration provision survives termination of subscriber agreement
On April 5, the U.S. Court of Appeals for the Eleventh Circuit held that an arbitration provision survived the termination of a subscriber agreement between a defendant cable company and a customer. According to the opinion, the plaintiff obtained services from the defendant in December 2016, and signed a subscriber agreement containing an arbitration provision covering claims that arose before the agreement was entered into and after it expired or was terminated. The plaintiff terminated the defendant’s services in August 2017, but later called the defendant in 2019 to inquire about pricing and services. The plaintiff filed a putative class action, alleging the defendant violated the FCRA when it accessed his credit report during the call without his permission, thus lowering his credit score. The defendant moved to compel arbitration, which the district court denied, ruling that while the parties may have intended for the arbitration provision to survive termination of the subscriber agreement, the plaintiff’s claim fell outside the scope of the subscriber agreement because “no reasonable person would believe that the Arbitration Provision was so all-encompassing as to apply to all claims regardless of when they occurred or whether they related to the agreement.” Moreover, the district court ruled that the Federal Arbitration Act (FAA) “could only compel [the plaintiff] to arbitrate his FCRA claim if it ‘arose out of’ or ‘relate[d] to’ the 2016 subscriber agreement, which the district court held it did not.
On appeal, the appellate court disagreed, concluding that the plaintiff’s FCRA claim relates to the 2016 subscriber agreement since the defendant was only able to conduct the credit check during the phone call because of its previous relationship with the plaintiff. The plaintiff argued that he was calling to obtain new services and not to reconnect services, but the appellate court countered that the “reconnection provision” contained within the subscriber agreement provides broad language that defines terminate, suspend, and disconnect as not necessarily being mutually exclusive. However, the 11th Circuit clarified that its holding is narrow, and that because it concluded that the plaintiff’s claim did arise out of the subscriber agreement the court did not need to and was not making a determination about whether the “broad scope” of the arbitration provision in the subscriber agreement is enforceable under the FAA.
3rd Circuit: Plaintiff must arbitrate debt adjustment allegations
On March 24, the U.S. Court of Appeals for the Third Circuit determined that a plaintiff must arbitrate proposed class claims brought against a debt resolution law firm. The plaintiff alleged the law firm engaged in racketeering, consumer fraud, and unlawful debt adjustment practices in violation of various New Jersey laws. The district court denied the firm’s motion to compel arbitration, applied the law of the forum state, New Jersey, and ruled that the arbitration provision was invalid and unenforceable. The law firm appealed, arguing, among other things, that the arbitration provision would have been found valid if the district court had applied Delaware law in accordance with the parties’ 2013 professional legal services agreement. On appeal, the 3rd Circuit disagreed with the district court, holding that the arbitration provision demonstrated that the plaintiff gave up her right to litigate her claims in court, despite there appearing to be a true conflict between Delaware and New Jersey law. The appellate court concluded that the arbitration clause met the standard set forth in Atalese v. U.S. Legal Services Group, L.P., which held that an arbitration provision “will pass muster if it, ‘at least in some general and sufficiently broad way,. . .explain[s] that the plaintiff is giving up her right to bring claims in court or have a jury resolve the dispute.’” Moreover, the 3rd Circuit noted that the arbitration provision was also sufficiently broad enough to reasonably encompass the plaintiff’s statutory causes of action.
Non-signatory may not arbitrate privacy claims
On March 9, the U.S. District Court for the Southern District of New York denied a global technology company’s motion to compel arbitration in a putative consumer privacy class action, ruling that the technology company is not party to a co-defendant telecommunications company’s terms and conditions, which require consumer disputes to be arbitrated. The proposed class alleged that the defendants “engaged in false, deceptive and materially misleading consumer-oriented conduct” in violation of state law “by ‘failing to disclose that its practice of recycling phone numbers linked to SIM cards, and selling those SIM cards to consumers without requiring prior users to manually disassociate their [] IDs from the phone numbers associated with the recycled SIM cards, did not protect the privacy of users’ data and confidential personal information.’” The defendants moved to compel arbitration based on arbitration provisions contained in the telecommunications company’s terms and conditions.
The court first reserved its decision on one of the plaintiff’s claims because there was an open question as to whether the plaintiff received a copy of the terms and conditions at the time the plaintiff purchased the SIM card. With respect to the other plaintiff’s sole claims against the technology company, the court ruled that the technology company cannot enforce an agreement to which it is not a party. “This general rule stems from the principle that arbitration is a matter of consent, since ‘no party may be forced to submit a dispute to arbitration that the party did not intend and agree to arbitrate,’” the court said. The court also ruled, among other things, that the plaintiff’s claims “do not allege any interdependent or concerted misconduct by” the defendants, and as such they are not so entangled that the plaintiff must arbitrate his claims against the non-signatory technology company.
6th Circuit: Delegation clause in arbitration agreement keeps case out of court
On March 4, the U.S. Court of Appeals for the Sixth Circuit determined that a district court “exceeded its authority” when it ruled that an arbitration agreement was unenforceable in a case disputing an allegedly predatory loan. According to the 6th Circuit opinion, the plaintiff claimed she was the victim of an illegal “rent-a-tribe” scheme when she accepted a $1,200 loan with an interest rate exceeding 350 percent from an online lender owned and organized under the laws of a federally recognized Montana tribe. The loan contract the plaintiff signed included a provision stating that “‘any dispute. . .related to this agreement will be resolved through binding arbitration’ under tribal law, subject to review only in tribal court.” The plaintiff filed suit, alleging, among other things, that the arbitration agreement violated Michigan and federal consumer protection laws. The defendant moved to compel arbitration, arguing that because the plaintiff agreed to arbitrate issues regarding “the validity, enforceability, or scope” of the arbitration agreement through a “delegation clause,” the court should stay the case and compel arbitration. The district court denied the defendant’s motion, “maintaining that the enforceability of the arbitration agreement ‘has already been litigated, and decided against [the defendant], in a similar case from the 2nd Circuit.’” The defendant appealed, arguing that the district court disregarded the delegation clause.
On remand, the 6th Circuit stated that its decision does not bear on the merits of the case but merely addresses who resolves the plaintiff’s challenges to the arbitration agreement. “It’s not even about whether the parties have to arbitrate the merits. Instead, it’s about who should decide whether the parties have to arbitrate the merits,” the appellate court wrote. Focusing on the delegation clause—which states that the parties agreed that an arbitrator, and not the court, would decide “gateway arbitrability issues”—the appellate court held that “[o]nly a specific challenge to a delegation clause brings arbitrability issues back within the court's province,” which was a challenge that the plaintiff failed to make.