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Inside ADR: July 2018

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Inside ADR: July 2018

Source: Inside ADR

Arbitrator’s Failure To Disclose Previous Mediation With Party Did Not Result In Evident Partiality Or Misbehavior

Ploetz v. Morgan Stanley
2018 WL 3213877
United States Court of Appeals, Eighth Circuit

Ploetz sued Morgan Stanley, alleging that it transferred Ploetz Trust funds without authorization.  The claim was submitted to FINRA for panel arbitration with 3 arbitrators. The chair selected for the panel, Barry Goldman, disclosed his role as arbitrator in 10 Morgan Stanley cases but failed to disclose his role as mediator in one case. After her claim was denied, Ploetz moved to vacate under the FAA, arguing that Goldman’s non-disclosure resulted in evident partiality and “misbehavior” by which her rights had been prejudiced.  The court denied the motion and Ploetz appealed.
The United States Court of Appeals for the Eighth Circuit affirmed. The Court’s interpretations of evident partiality included when an undisclosed relationship: “created an impression” of possible bias; “cast doubt” on the arbitrator’s impartiality; objectively demonstrated “such a degree of partiality that a reasonable person could assume that the arbitrator had improper motives.”  Ploetz did not show Goldman had evident partiality under any of the standards, failing to explain why Goldman’s undisclosed past mediation precluded him from being impartial in the arbitration.  Ploetz’s argument that Goldman was guilty of misbehavior in failing to disclose per FINRA rules also failed.  Violation of a party’s rights under FINRA was not enough to merit relief.  Ploetz did not show that she was deprived of a fair hearing, as required for vacatur.

No Reasonable Notification To Parties In Online Arbitration Agreement

Cullinane v. Uber
2018 WL 3099388
United States Court of Appeals, First Circuit

Cullinane and others (Users) filed suit against Uber, alleging that it violated Massachusetts’ consumer protection law by knowingly imposing fictitious or inflated fees and surcharges.  Uber removed the case to federal court and moved to compel arbitration per an online arbitration agreement.  The court granted the motion to compel and dismissed the case. Users appealed. 
The United States Court of Appeals for the First Circuit reversed and remanded.  The Court used a two-step legal framework for the enforceability of contracts in online agreements: 1) whether the terms were reasonably communicated, and 2) whether the terms were accepted by the parties.  Critical to reasonable communication are conspicuousness and clarity of terms, which were not present here. Users created their Uber accounts through a registration process in which an arbitration clause was available via a hyperlink that was not conspicuous.  It was not blue, as many hyperlinks are.  It was in white bold font in a gray rectangular box.  Other terms on the same screen had a similar or larger font size and typeface and had more noticeable attributes, which diminished the hyperlink’s capability to grab the user’s attention.  The text used to notify potential users that the creation of an Uber account would bind them to the linked terms did not have distinguishable features to set it apart from other terms.  Given that the account terms were not reasonably communicated, Users could not be found to have assented to the agreement to arbitrate.

Arbitration Provision Did Not Extend To Third-party Beneficiary

Cortes-Ramos v. Martin-Morales
2018 WL 3134601
United States Court of Appeals, First Circuit

Cortes submitted an original song and music video in a Sony-sponsored Supersong contest that involved recording artist Ricky Martin (Martin). As a finalist, Cortes signed several documents, one of which included a dispute resolution clause providing “(a)ll actions or proceedings arising in connection with, touching upon or relating to these Official Rules…shall be submitted to arbitration.” Cortes sued Martin for violations of federal copyright and trademark laws, alleging that Martin’s music video was similar to the video Cortes submitted for the contest.  The court dismissed the claim, concluding that Martin, though not a signatory, could invoke the contest’s arbitration agreement because he was a third-party beneficiary and the face of Supersong.  Cortes appealed.
The United States Court of Appeals for the First Circuit reversed. Intent to provide benefits to third parties in an arbitration agreement is an exception to the rule that contracts do not grant enforceable rights to non-signatories.  Martin needed to show that the contracting parties intended to confer a benefit on him.  The language of the contract contained an exception suggesting that it did not. The exception referred to “either party” or “neither party” – and the context of the language made clear that the only parties contemplated were co-sponsors and contest entrants.  Martin was neither.  Additionally, the drafters, though they referred to Martin in other parts of the contest rules (as the international recording artist/Superstar), their failure to reference him in the arbitration provision was significant. Martin’s argument that he was intrinsically linked to the contest did not provide the special clarity required to show he was a third-party beneficiary. 

Vacatur Of Arbitral Award Not Warranted Under FAA’s Evident Partiality Standard

Republic of Argentina v. AWG Group Ltd.
2018 WL 3233070
United States Court of Appeals, District of Columbia Circuit

Argentina had a contract with AASA, a consortium of 7 companies, including AWG, Suez, and Vivendi.  The companies invested in and operated Argentina’s water services pursuant to a contract in which Argentina promised fair and equitable treatment of the investments (fair treatment provision).  When Argentina froze the tariffs that AWG could charge customers during an economic crisis, AWG sued, arguing that Argentina breached the contract by treating them unfairly.  The case was arbitrated for 12 years, at the end of which a unanimous panel rejected Argentina’s necessity defense and found that it had breached the contract.  The panel awarded AWG the profits they would have realized had Argentina honored the fair treatment provision.  Argentina moved to vacate and AWG moved to confirm.  The court granted the petition to enforce and Argentina appealed. 
The United States Court of Appeals for the District of Columbia Circuit affirmed.  Argentina argued that panelist Kaufmann-Kohler showed evident partiality under the FAA because she sat on the board of directors for UBS, a company with investments in Suez and Vivendi.  Kaufmann joined the board three years into the arbitration and did not learn of the investments in Suez and Vivendi until Argentina petitioned for her recusal in 2007.  The other panelists rejected the recusal, finding that the board’s interests in Suez and Vivendi were too trivial to cause a reasonable person to doubt Kaufmann’s fairness.  Kaufmann resigned from the board two years later.  The FAA’s evident partiality standard imposes duties on an arbitrator with significant interests in the parties. Here, Argentina failed to show significant interest. The relationship between UBS and Suez and Vivendi was that of a passive investor and the percentage invested was less than .06% of the $3.67 trillion UBS had in invested assets. Argentina provided no support to show that the passive investments UBS made in Suez and Vivendi created evident partiality in Kaufmann. Argentina also argued that the panel exceeded its authority by rejecting the country’s necessity defense without explanation.  The Court explained that extensive explanations were not required since doing so would undermine the speed and thrift of arbitration proceedings.  Argentina did not point to anything in the record suggesting that the panel rejected the defense to suit its own preferences instead of the criteria set out in the agreement.

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