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Arbitration, Financial Services Disputes, and Derivatives

7 hours 2 min ago

James Freeman of Allen & Overy has written a concise, informative and forward-looking article in the IBA’s publication Business Law International that offers a clear-eyed look at the state of arbitrated conflict resolution in the financial services industry and points to the Arbitration Guide recently published by the International Swaps and Derivatives Association (ISDA) as a path to change.

Freeman notes that, distinct from other commercial sectors, the financial services industry has “proven relatively immune to the lure of arbitration,” preferring litigation before national courts, for a variety of reasons.  Despite the absence of a global mechanism for enforcement of judgments, of the type that is offered for the enforcement of arbitral awards via the New York Convention, and despite promises of relative cost savings, efficiency and confidentiality, Freeman cites two predominant concerns favoring litigation of financial disputes.

The first is structural: that arbitrators may be commercially incompetent, that they have fewer procedural assurances, and that their powers may be limited (particularly in granting ex parte relief).  The infrequency of major banks’ refusal to comply with a judgment rendered by a court in a major commercial jurisdiction reinforces the absence of concern about that issue.

The second is conceptual: that arbitration is ill-suited to financial instruments that are intended to be traded.  Can an undertaking to arbitrate disputes, as part of an indenture or bond that is intended to be exchanged, transfer rights or obligations to subsequent purchasers of that instrument?  Can the holder of a security be bound by an agreement to arbitrate that is neither written nor signed by that holder?  In the case of transactions involving consumers, are agreements to arbitrate enforceable in all jurisdictions?

The ISDA Arbitration Guide departs from this set of concerns.  Traditionally ISDA Master Agreements have called for the jurisdiction of the English or New York courts.  Moreover, players in the derivatives and swaps market were largely uninformed of arbitration options, resulting in drafting errors in conforming the various clauses in the Master Agreements (such as service of process).

After a period of consultation, ISDA promulgated the 2013 ISDA Arbitration Guide, which provides a basic overview of the law and practice of international arbitration and provides 11 model clauses designed to be incorporated into a Master Agreement.  These clauses provide for arbitration pursuant to the rules of seven different providers, with seats in seven different venues.  In providing these clauses, the Guide “ensures avoidance of the common drafting errors” and also “incorporates what is essentially a standard arbitration clause for the arbitral institution specified.”   Moreover, a list of options is helpfully provided, to encourage drafters to consider questions of party joinder, consolidation, state players, criteria for arbitrator competence, and other issues.

Freedman concludes that “the Guide is a valuable tool to educate the derivatives markets about the characteristics of international arbitration and the circumstances in which it might best be employed.”  He also concludes that the provision of expert arbitrators (as is the aim of P.R.I.M.E. Finance, for example) might be the single dispositive factor in providing dispute resolution processes that meet the challenges posed by the users.

Many legal and business practitioners have begun to question the prevailing use of attorneys, rather than industry participants, as arbitrators in disputes involving commercial custom or industry practices.  Freeman’s description of the ISDA initiative is particularly tantalizing in that context, as it places commercial disputes before industry peers rather than those learned in law.

ICC International Commercial Mediation Competition

Thu, 2015-02-19 09:38

Professionally, I am not given to bedazzlement.  I am not among those who claim transformative or quasi-spiritual attributes to what (to me) really boils down to the learn-able professional skill of mediating business disputes.  So when friends have reported their experiences attending the ICC International Mediation Competition with tears streaming down their blushing faces, stammering and gushing about how it had changed their lives, I thought I was learning more about them than about the event.

Well, this year I attended for the first time as coach of the New York Law School team.  And… blush blush, gush gush, stammer stammer, stream stream….

This is a remarkable event, measured by any standard.  Here are gathered about 250 well-trained and focused students from 67 business schools and law schools located in six continents, all highly motivated and practiced in certain distinct skills, prominent among them (a) how to listen constructively; (b) how to identify what the other party to a dispute needs; (c) how to use the intervention of a third party to create options that address the identified commercial needs of your client and of the counterparty; and (d) how to recognize when you have obtained your client’s objectives on satisfactory terms.

These are valuable skills in any of us, and I dare say lawyers who regularly practice them distinguish themselves.  But 250 of them gathered in a room?  And they are all 24-30 years old?  And they are happy?  And they are ambitious?  What a zing!

And then you look around and realize that here, acting as judges or coaches or volunteer mediators, is… well, everybody!  Here’s Lela Love from Cardozo, and Thierry Garby from Paris, and Colin Wall from Hong Kong, and Jim Lawrence from Houston.  And over here is Ewa Gmurzynska from Warsaw.  There’s Giovanni De Berti from Milan.  Hal Abramson from Tuoro.  Bill Marsh from London.  Patrick Van Leynseele from Brussels.  This is better than Old Timer’s Day — it’s like you died and went to mediation heaven!

The starry-eyed part, though, came when I watched my own team grow in confidence, competence, perception and skill, almost by the hour — and to see first-hand the accretion of professional opportunity through personal relationships.  They met peers from Lagos:

Moscow:

Goa:

Australia:

…and even far-away Houston:

No one was more astonished than we to learn that we had advanced through the preliminary rounds to join the 16 Eighth-Finalists — and then the 8 Quarter-Finalists!  To succeed to that level on the first outing was heady stuff.

But who can measure the impact that these connections and friendships will have on these students’ careers?  Who can quantify the value of being able to call someone in Sao Paulo and re-introduce yourself from that time in Paris in 2015 and ask advice on resolving a dispute in Brazil?

And who can put a number, or a measure, on giving two young lawyers the experience of knowing — not being told, but actually experiencing — that their generation of attorneys includes not just litigators and deal-negotiators, but also a core of trained problem-solvers on every continent — and they know a lot of them already?

Darley Maw, NYLS 2L, and Colin McGeough, NYLS 2L

ADR Center to Conduct New Survey of ADR in Europe

Mon, 2015-01-19 19:25

Our friend Giuseppe De Palo reports that the European Parliament’s Legal Affairs Committee (“JURI”) will discuss mediation again at the February 26, 2015, ‘Civil Law & Justice Forum’ in Brussels, and the ADR Center has been asked to present a follow-up to its 2014 study, “Rebooting the Mediation Directive.”

 

The Center has prepared a survey that will be the basis for its presentation, and seeks to have as many and as varied people as possible complete it.  The short mediation survey can be found at this link: https://it.surveymonkey.com/s/77T6PKK.  All those in the EU who are interested in ADR are encouraged to fill out the survey and encourage others to do so.

 

CLE Program on “ADR and Young Lawyers”

Wed, 2015-01-14 11:52

The ABA Business Law Section is partnering with New York Law School to present a half-day CLE Symposium on “ADR and the Young Lawyer” on Friday morning, January 30.

               

The event, held from 9:00 to 1:45, features speakers from leading corporations, law firms and ADR institutions, and advises lawyers on how competency in ADR skills can assist them in creating distinctive careers and practices.  3.0 CLE credits are offered and both breakfast and lunch are offered.

The Keynote speaker will be Paulette Brown, President-Elect of the ABA.

Information and registration can be found here.

 

New Book on “Business Divorce”

Wed, 2015-01-14 09:46

A while ago I was engaged to assist two partners who had worked since their college years to build up a very successful business.  Now, more than 25 years later, they could barely be in the same room with each other, and wanted help in finding a way out.

Just the other day, I opened the first page of Stephen H. Knee’s book, Business Divorce, and found this problem described:

Two individuals form a business.  One has expertise in the normal back-office functions, the other is a great salesperson.  Over the years, one of the individuals begins to feel that she is contributing much more to the business than the other individual and that is unfair, because both are drawing the same salary and are 50-50 owners.  The resentment results in the individuals barely communicating with each other and adversely affects the performance of the business.  The decision-making process becomes deadlocked — the resentment builds until there is an event that pushes the first individual over the cliff.  The battle has begun.

Stephen Knee, where were ya when I needed ya??

This is one of those thin books — barely 100 pages — that you wonder how you did without all these years.  The author has simple and straightforward advice for drafters of partnership, LLC and other similar agreements, that emphasize the importance of buy-sell provisions, triggering events, dispute resolution provisions, disputed valuations, and tax considerations.  Psychologist Jane M. Sullivan writes about the inescapable dynamics of closely-held businesses, which often dominate the process of business divorce far more than economic or legal considerations.  Knee reminds us, too, that an ADR specialist is not the only essential consultant in a business divorce — legal, accounting, business and even psychological insight is often appropriate in order to fashion a break-up agreement that is mutually satisfactory and sustainable.

In characteristically straightforward writing, Knee addresses the legal ethics of lawyers’ consulting in business breakups, citing the caution in the ABA’s Model Rule of Professional Conduct 1.7(a), that the consulting lawyer “determine at the outset who the professional is representing and advise the other parties to retain their own professionals.”  And he gives an illustrative laundry list of legal and other issues that are implicated in the break-up process: handling existing obligations of the entity, settling the owners’ non-monetary benefits like health and life insurance; addressing contingent liabilities such as pending or threatened litigation, managing dissenters’ rights in corporations, and a host of other issues such as union contracts, regulatory and environmental concerns, government filings, and (by contributor Kenneth G. Hydock) tax treatment of the dissolution transactions.

In such a complex context, the use of ADR processes to resolve issues that are not agreed upon, while specifically and intelligently addressed, seems almost an afterthought, however necessary.

This is a great guidebook, one that can be (and clearly must be) reviewed before any of us venture into the mine-laden fields of assisting individuals in managing business break-ups.

 

Invitation for Students to Examine Civil Conflict

Wed, 2015-01-14 08:20

Professor Stacie Strong of the University of Missouri has announced a student writing competition to prompt critical thinking on the dispute resolution ramifications of the events surrounding the killing in Ferguson, Missouri and elsewhere.  The details of the competition are below.  It will be interesting to see what examples of rigorous critical thinking this initiative prompts.

Please consider forwarding this information to students and law schools with which you may be connected.  The window is brief — submissions must be received by February 13, 2015.

CALL: The University of Missouri Center for the Study of Dispute Resolution is pleased to announce a student writing competition that is being organized in conjunction with the Missouri Law Review annual symposium, entitled “Policing, Protesting, and Perceptions: A Critical Examination of the Events in Ferguson.”  The symposium, which will feature speakers and works-in-progress participants from around the country, addresses recent events in Ferguson, Missouri, as well as similar developments from around the nation.    The writing competition features a $700 prize for the competition winner, a $100 prize for the second place winner and an honorable mention for the third place winner.  Prizes are sponsored by the University of Missouri Chancellor’s Diversity Initiative and private funding through the Missouri Law Foundation.   Topic   Submissions must bear some relationship to the upcoming Missouri Law School symposium entitled “Policing, Protesting, and Perceptions: A Critical Examination of the Events in Ferguson.”  Papers can consider the events in Ferguson and elsewhere in the nation from the perspective of civil rights, police-community relationships, police perceptions of individuals, protests and/or civil disobedience. Essays can be historical (for example, submissions could consider the history of the legal response to social unrest in this country, dating back to the 1968 Kerner Commission report to the U.S. Commission on Civil Rights in the wake of the Watts Riots), process-oriented (for example, authors could analyze the evolution and legitimacy of hearings in front of the U.S. Commission on Civil Rights) or psycho-social in nature (for example, papers could discuss the value of having a forum in which to speak and be heard).   All submissions must incorporate either a conflict resolution (sometimes called “peace studies”) or dispute resolution perspective so as to provide some guidance on how to address the outstanding problems and tensions in a useful manner. For example, authors might consider whether and to what extent communities might wish to adopt certain procedures that are often seen in dispute resolution (such as mediation or conciliation) in order to facilitate discussions with local police forces. Alternatively, authors can take look at the genesis of the problem using a conflict studies/peace studies approach.   Eligibility   The writing competition is open to all persons enrolled on February 1, 2015, in an ABA-accredited law school to pursue a degree in law (including the J.D., LL.B., LL.M. or S.J.D.).  Applicants may be of any nationality.  Papers that have been accepted for publication elsewhere are not eligible for the writing competition. Submission Requirements   Submissions must be in English and should be between 2,500 and 3,500 words in length.  The style of the paper will be that of a long “op-ed” (opinion editorial) piece. However, the strongest submissions will include references to legal authorities as necessary. Any citations should appear in the body of the submission and will be included in the total word count.   The text of the paper must be typed with double spaced pages in 12 point Times New Roman font (or similarly legible typeface) and 1-inch margins.  The title of the paper must appear on every page of the submission.  The author’s name must not appear anywhere on the submission itself.   A separate document should be provided including (1) the author’s full name, address, telephone number and email address; (2) the degree-granting institution where the author is enrolled, as well as the degree sought and the anticipated year of graduation; (3) the title of the submission; and (4) the date of the submission.   Papers must be electronically submitted to:
Laura Coleman
Center for the Study of Dispute Resolution University of Missouri School of Law
colemanl@missouri.edu    Papers must be received no later than 11:59 p.m., Central time, on February 13, 2015.   Late papers and papers that do not comply with the submission requirements will not be considered by the selection committee.   Criteria   Submissions will be judged anonymously by the selection committee.  The following factors will be considered:   Legal analysis
  • Thoroughness and depth in addressing the topic, particularly with respect to dispute resolution and/or conflict resolution issues
  • Awareness of significant literature and authorities in this field
  • Contribution to the current debate on this topic
 More information can be found on the competition website: http://law.missouri.edu/faculty/symposium/lawreview2015/writing.html  Questions should be directed to:   Professor S.I. Strong
University of Missouri School of Law
Email:  strongsi@missouri.edu 

 

Hard Data on ADR Practice

Mon, 2014-12-22 12:19

There may be some serious ADR practitioners who have not heard of Tom Stipanowich’s recent articles analyzing the results of the CCA survey on trends in commercial arbitration.  And for those few folks, I copy Tom’s note to me, along with the links:

We are pleased to announce the publication of two articles that present extensive new data on practices and trends in commercial arbitration, including results from and analysis of a groundbreaking empirical survey of perceptions and practices among experienced arbitrators.

Reflections on the State and Future of Commercial Arbitration: Challenges, Opportunities, Proposals and its companion piece, Arbitration in Evolution: Current Practices and Perspectives of Experienced Arbitrators, will soon be published in Columbia’s American Review of International Arbitration.  However, they may now be accessed at the following SSRN links:

http://ssrn.com/abstract=2519084

http://ssrn.com/abstract=2519196

These articles contain new information and insights on many different aspects of commercial arbitration practice in the U.S. and in international disputes.  Topics include the habits and attitudes of business users and their attorneys; barriers to making effective choices regarding arbitration; standards for arbitrator decision making and methods of managing perceived risks in arbitration (including appellate arbitration, final offer arbitration and other alternatives); the variety of proactive approaches now employed to promote economy and efficiency in arbitration; the handling of pre-hearing motion practice and discovery; management of hearings; issues of diversity in arbitration tribunals (including the  gender and the professional background of arbitrators); perceptions of party-appointed arbitrators on tripartite panels; the dramatic growth in the ranks of self-described “dispute resolution professionals”; the education, training and credentialing of arbitrators; legal advocacy in arbitration; arbitrators and settlement; the impact of mediation on arbitration and arbitrators; the growing emphasis on early evaluation or case assessment; the impact of technology; and the insights drawn from behavioral science and “big data.”

Tom is richly informative but — it must be said — seldom concise, which is fine for us Wagnerians  As I tell my wife when I embark to Seattle or Bayreuth for a Ring Cycle, some stories take a while to tell.  And Tom and his colleagues tell this story better than anyone.  So over the holiday break, light the fire, get some cocoa, and enjoy the peerless company of Tom Stipanowich.

Moral Imagination Revisited via Jon Hyman

Mon, 2014-12-22 12:01

The recent confluence of my Conflict Transformation work with the New York Yearly Meeting of the Society of Friends (Quakers) and the richly rewarding session offered by David Hoffman at the April 2014 Meeting of the ABA Dispute Resolution Section have made me increasingly aware of the moral component of non-adjudicative conflict resolution.  I was mentioning this to a colleague, Jon Hyman of Rutgers, who no sooner blinked than popped me over a real tasty paper that is about to be published by Nevada Law Journal.

Titled Beyond Fairness: The Place of Moral Foundations Theory in Mediation and Negotiation, the paper’s argument is set forth by its author as follows:

Intuitive moral judgments pervade mediation and negotiation but are not well understood or managed. People usually experience them in terms of “fairness.” A sense of unfairness can fuel a conflict or prevent an agreement; a sense of being treated fairly, or presented with fair terms, can close a deal. Despite the ubiquity of moral judgments, negotiators and mediators have generally not articulated a coherent and explicit way to deal with them. Moral Foundations Theory, developed by psychologist Jonathan Haidt and colleagues, provides an intriguing means to do so. Rather than relying on some general sense of fairness, Moral Foundations Theory disaggregates moral judgments into six distinct mental modules: Fairness/Cheating; Care/Harm; Loyalty/Betrayal; Authority/Subversion; Sanctity/Degradation; and Liberty/Oppression. Particular moral judgments might be located along one or more of these scales.

In this paper, I explore ways in which Moral Foundations Theory sheds light on mediation and negotiation. I identify the modules at work in a variety of mediations and negotiations that have been described in the literature. In some, we notice that moral modules – in addition to Fairness/Cheating – explain surprising shifts from opposition to agreement. The modules even help explain the enduring attractiveness of value-creating, interest-based negotiation, since that approach requires some care for the other, to try to meet their needs, rather than just imposing a harmful loss on them, as strictly distributive, competitive negotiation often does. 

Moral Foundations Theory remains contested. Is the concept of mental modules, on which it depends, viable? Are there exactly six modules, and are these six the right ones? Can we adequately understand the modules in vivo? Nevertheless, accepting it as a plausible tool, and contingent on its further development, it can provide mediators and negotiators with greater insight into the dynamics of the conflicts they face. Moreover, it can reveal opportunities to ameliorate strong negative moral intuitions and thus provide a clearer path to agreement.

When we facilitate others’ resolution processes, we all wish that we were neutral in every sense, and that as professionals we create neutral environments in which disputants are invited to perceive self-interested outcomes.  Yet the process of conflict facilitation necessarily forbids moral neutrality, the same way that not every article in the New York Times front page can appear above the fold.  I commend this work to all whose curiosity leads them into these uncomfortable forests.

Najar on Dispute Management 2.0

Fri, 2014-12-19 11:33

Jean-Claude Najar has labored in the fields for General Electric in such onerous assignments as Florence and Paris.  He nevertheless maintained his good cheer, and from his new position as international counsel at Curtis, Mallet-Provost, Colt & Mosle he has contributed a terse and sane statement of best practices, appearing in the September 2014 edition of IBA’s publication Business Law International.  The title is Corporate Counsel in the Era of Dispute Management 2.0.

Najar, his colleague Michael McIlwrath, his former colleague PD Villarreal, and others at General Electric were responsible for pounding into my head two distinctions.  The first was the concept of “dispute management” rather than “dispute resolution,” and the other was “Early Dispute Resolution” rather than “Alternative Dispute Resolution.”  Pondering the implications of the distinctions they were making — and trying to master the practice of requiring Early Case Assessments from outside counsel — led to an appreciation of commercial conflict practices that has framed my thinking ever since.

In his recent article, Najar credits Villarreal with the perception that “reducing litigation costs would require transforming GE’s legal policy fundamentally,” implicating not only an institutionalized ADR program but “changing how lawyers viewed their role, how the company viewed its legal docket and how managers worked with lawyers to handle disputes.”  Najar — quite correctly in my view — cites the resulting realignment as a paradigm for multinational companies involved in the global economy.

Central to the redefinition of the role of the lawyer in the company is the critical concept of conflict management.  Disputes conclude either through agreement or adjudication, and the former is far more business-rational (as well as less expensive to accomplish).  So companies have evolved, says Najar, to incorporate management of disputes into their culture, for “true pragmatic/economic reasons.”  In the case of GE Oil & Gas, Najar hired Michael McIlwrath to “manage” (rather than “prosecute”) the company’s litigation docket, yielding a reduction in large litigations from 143 in 1999 to 25 in 2002.  Najar cites such initiatives as the CPR Pledge as prompting efficient, realistic dispute management policies, and the 2013 Fidal/AAA/ICDR survey as documenting their impact.

Increased company involvement in international arbitration proceedings has also been salutary.  As the primary users of the process, says Najar, “companies have made real efforts to regain control over their disputes by increasing their involvement in the decision-making process related to arbitration,” arising from the understanding that “arbitration could not be perceived separately from the conflict itself that led to the arbitral process,” and therefore mediation and other conflict management tools played a vital role in the resolution of many disputes.

The key to modern corporate conflict management is “corporate culture, communication and a more horizontal involvement of the legal department.”  Early Dispute Resolution protocols act as a “toolkit” encouraging business managers to assess the costs of pending disputes and to consider creative — business-oriented — ways to solve them.Among the resources at the disposal of corporate managers is the newly launched Effective Management of Arbitration: a Guide for In-house Counsel and Other Party Representatives, released 6 June 2014.

Few commentators emphasize, as Najar does, the role of leadership at the highest executive level in order for the culture shift to take place on which change depends.  General Electric’s experience continues to act as a rewarding case study.

Consumer Arbitration Agreements: Not Understanding What You Didn’t Agree To

Wed, 2014-11-19 18:51

A recently posted paper, reporting on the results of an empirical study, reveals unsettling facts about consumer understanding of arbitration contracts.  Titled “Whimsey Little Contracts” With Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, the paper explores the extent to which consumers are aware of, and understand the effect of, arbitration clauses in connection with their purchases of goods and services.

The authors report “a profound lack of understanding about the existence and effect of arbitration agreements among consumers.”  Fewer than half of those surveyed recognized that a sample contract included an arbitration clause, and more than half of those respondents believed that the clause not deprive them of a right to seek judicial redress.

So in whose book is this a contract?

This work — reported by St. John’s Law professors Jeff Sovern, Elayne E. Greenberg, Paul F. Krigis and Yuxiang Liu — deprives any court of the ability to rely upon classic contract theory to enforce these “agreements” by analogy to arbitration agreements that are entered into intentionally between merchants, in collective bargaining agreements, or in other contexts.  Put simply, the authors of this paper demonstrate that, as a matter of provable fact, one party to these consumer agreements either doesn’t know that he agreed, or doesn’t know what he agreed to, or (most frequently) both.

The study involved an online survey of 668 consumers.  Each was shown a credit card contract with an arbitration clause, and asked eight questions concerning it and about “an imaginary contract containing a ‘properly-worded’ arbitration clause.”  The arbitration clause in the contract was printed in bold type and portions appeared in italics and ALLCAPS.    The arbitration section was preceded by the sentence “It is important that you read the entire Arbitration Provisions section carefully.”  Some findings:

  • Only 43% of respondents recognized that the sample contract contained an arbitration clause.  A majority of respondents either thought that they had not agreed to arbitrate, or did not know.
  • Only 14% of respondents realized that the contract banned litigation in court.
  • Less than 9% realized both that the contract had an arbitration clause, and that it would prevent them from suing in court.
  • More respondents thought an arbitrator’s decision was not final than thought it was.  Less than a fifth realized that the arbitrator’s decision would in fact be final.
  • More than 70% failed to realize that the contract prohibited class claims.

The paper contains a very tidy and responsible review of the history of arbitration and the development of American arbitration law.  It also includes — most helpfully for the purposes of the survey — data on how few consumers even read sellers’ statements of terms and conditions, much less comprehend them.  One study of 45,091 households found that only one or two shoppers out of every thousand access the license agreement when purchasing software.  And were they to do so, they would have their work cut out for them; many agreements are of daunting length.  Write the authors, “the iTunes contract is reportedly 32 feet long, even when printed in 8 font type.”

The import of this study seems simple and direct:  There may be legal foundations for binding a consumer to an agreement to arbitrate in connection with a purchase, but consent is not one.

And as the Supreme Court held in Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 479 (1989), “Arbitration under the [Federal Arbitration] Act is a matter of consent.”

Agreements to Arbitrate, Redux

Wed, 2014-11-19 09:51

Following up on a prior post, two recent cases have tested the enforceability of “agreements” that one party unilaterally propounded and the other party had no idea existed.  Though the Ninth Circuit found both to be non-binding, the logic in both cases implies that knowing consent — an element of contract law that is emphasized in law school as fundamental —  seems no longer to be a requirement in “agreeing” to arbitrate future disputes.

In Nguyen v. Barnes & Noble, (CTA 9 August 18, 2014), Kevin Nguyen purchased two Touchpads on Barnes & Noble’s website.  The order was cancelled “due to unexpectedly high demand” and Nguyen filed a suit in California state court on behalf of himself and others similarly situated, alleging that the company had engaged in deceptive business practices and false advertising.  The company removed the action to federal court and moved to compel arbitration.

The company argued that a hyperlink on the website, appearing s “Terms of Use,” bound Nguyen to arbitrate and banned class claims.  the full text of the Terms of Use stated that, be merely visiting the website or by making a purchase from it, a consumer is deemed to have accepted the terms set forth.  And Section XVIII of those Terms provided that any claim against the company would be resolved by binding arbitration in which no personal appearance is required, and in which class claims are barred.  The company argued that Mr. Nguyen’s mere access to the website but him on “constructive notice” of Section XVIII, and that “constructive notice” was the legal equivalent of agreement.

The Ninth Circuit affirmed the trial court’s denial of the company’s motion to compel arbitration.  It distinguished “clickwrap” agreements (in which a user is presented with terms and conditions of use and is required to click her agreement before making any purchase) from “browsewrap” agreements (in which terms and conditions are available for a user’s review but the user is able to purchase items without manifesting consent to them).  While observing that some “browsewrap” notices can form enforceable agreements, actual notice of the contract terms [I blush to use the word “contract” in this context] must be demonstrated, as well as continued use of the website subsequent to such notice.  One such set-up found enforceable was a site in which the user could not “Sign Up” without clicking a button that recited that the user had “read and agree[d] to the Terms of Service.”  Including, presumably, Section XVIII.  Reviewing case law, the court summarized that “the conspicuousness of the placement of the “Terms of Use” hyperlink, other notices given to users of the terms of use, and the website’s general design all contribute to whether a reasonably prudent user would have inquiry notice of a browsewrap agreement.”

The second opinion, Knutson v. Sirius XM Radio, (CTA 9 November 10, 2014), involved the purchaser of a Toyota vehicle that included a 90-day subscription to Sirius XM satellite radio.  Upon purchasing the vehicle, Knutson began getting telephone calls from Sirius and an unsolicited mailing that included a purported “Customer Agreement.”  He brought a class action suit alleging violations by Sirius of the Telephone Consumer Protection Act.  The district court granted a motion to compel arbitration, based on a provision in the “Customer Agreement” that Sirius had unilaterally drafted and unilaterally sent to Knutson.  The “Agreement” provided, among other things, that Knutson would be bound thereby unless he took action to the contrary, and that Sirius could modify the terms of the Agreement by “unilateral amendment.”

Sirius’ Agreement contained a provision requiring Knutson to waive the right to go to court, waive the right to assert claims on a class basis, and submit to binding arbitration.  Knutson ignored the Agreement because he did not think he had entered into any legal relationship with Sirius when he purchased his Toyota.  The Ninth Circuit agreed, and reversed the district court’s order compelling arbitration.

“Applying well-settled principles of contract law,” the court determined that Knutson had never assented to Sirius’ Customer Agreement.  In particular, the court held that Knutson had evidenced no “outward manifestations of consent” that would lead to the conclusion that, as offeree, he had consented to Sirius’ offered terms.  Knutson reasonably thought he had entered into a contract only with Toyota and was under no obligation to open, read, or act upon notices provided to him by Sirius.  “There was no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a contractual relationship with [it].”

The legal basis of the court’s conclusion is one that most first year law students would recognize: “A party to a contract cannot be held to the contract’s arbitration provision where the plaintiff does not know a contract exists.”

So far so good.  But are we really saying that, if Barnes & Noble repositions its “Terms and Conditions” button, a “clickthrough” purchaser of a book knows that she’s entered into an agreement to arbitrate?  Or, if Sirius adjusts its marketing a bit, that the purchaser of a car could be obligated to the radio signal supplier?  Has the law of Section 2 of the FAA so devolved that not only is no written consent required, but  “clicking” a button or turning on a radio constitutes consent?  Is buying a Toyota, or buying a watchband, or visiting a website, an agreement to waive class action rights?

Two questions present themselves:  What is sufficient to evidence contractual consent, and how does one determine whether a party knows what she is consenting to?  The second question may be framed:  “Say you present a purchaser of a gallon of milk with a piece of paper that says that, if she leaves the store with the milk, she must arbitrate any claim against the seller.  Does she know what ‘yes’ means?”

That question will be discussed in distressing terms in a subsequent post.

The Sound of Glass, Tinkling

Thu, 2014-11-13 10:45

The College of Commercial Arbitrators is perhaps the definitive authoritative body for best practices in commercial arbitration from the perspective of practitioner arbitrators.  Its promulgated standards are widely respected and its leaders are leaders of leaders.

It is therefore with great satisfaction that I note that the CCA has selected its first female President, Deborah Rothman.

Deborah’s being the first female President of this prestigious organization is of a piece with her life and career. She was the first person in her family to go to college and, therefore, to go to law school and, therefore, to practice law.  She was a segregation-breaker as a participant in the first-ever small-scale exchange of college students to test the impact of coeducation on their single-sex schools, and was one of 10 Vassar undergrads to spend second semester of sophomore year at Trinity.

She transferred to Yale College as one of the first undergraduate women to matriculate in the College.  Her class was the first coed graduating class in Yale’s history.  She believes, but cannot prove, that she was the first Yale College graduate to work as a cocktail waitress in the French Quarter.

Continuing this pattern, while studying law at NYU Deborah was one of the first law students to participate in a 4-year joint JD/MPA program with the Woodrow Wilson School at Princeton, garnering one of the first joint JD/MPA’s from the 2 schools.  Some years later she co-created the first-ever consumer show for the pregnancy-through preschool market: “Baby Fair.” Adopting a full-time career as a mediator/arbitrator  in 1991, she says that she cannot claim to have been one of the first.  But I am hard-set to name one who came before.

So cheers to Deborah.  And with no disrespect, let’s join conductor Marin Alsop, who, speaking last year from the podium as the first woman to conduct the “Last Night of the Proms,” yearned for the day when there would be no more “firsts” for women, and dedicated the concert to “the second, third, fourths, fifths, hundredths to come.”