(Note: This post from November 3, 2017 has been updated to reflect the May 21, 2018 decision by the U.S. Supreme Court confirming that class action waivers are not precluded by the collective bargaining provision of the National Labor Relations Act)
Many businesses fail to give forum selection clauses much thought, focusing instead on negotiating the material business terms when drafting or negotiating their agreements. However, a carefully-crafted and thoughtful forum selection clause can save businesses significant time and capital. Hastily consenting to “submit disputes to arbitration” is not the answer, as hundreds of businesses end up in court litigating about whether they should be there at all.
Arbitrability “is a term of art covering ‘dispute[s] about whether the parties are bound by a given arbitration clause’ as well as ‘disagreement[s] about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy.’”1 Recent cases in New York highlight important takeaways that can improve companies’ bottom lines, whether by avoiding unnecessary litigation regarding where to litigate (due to conflicting forum selection clauses in multi-contractual disputes or ambiguous forum selection clauses), or by utilizing highly specific language in forum selection clauses and understanding the rules of the chosen forum.
Delegation Clauses and Their Implications
Generally, arbitrability (whether an agreement to arbitrate exists, and whether it covers the dispute) is an issue for the courts to decide.2 However, parties can specifically provide, in what is known as a “delegation clause,” that arbitrators not only have exclusive jurisdiction over a dispute, but also exclusive jurisdiction over “any question as to its arbitrability.”3 Further, even without an express “delegation clause,” if an arbitration agreement incorporates by reference a forum’s rules, the parties may have contracted away their right for the courts to determine the threshold issue of arbitrability.4
New York Courts have provided for a couple of small carveouts to this rule. Incorporation by reference of a forum’s rules reserving arbitrability to itself does not constitute “clear and unmistakable evidence” that the parties intended to delegate arbitrability to an arbitrator where the arbitration agreement is narrow.5 Moreover, where a party claims that they never assented to the agreement containing the arbitration clause, courts will determine whether the parties assented to the agreement notwithstanding the delegation clause.6
Takeaway: Know the applicable rules in the selected forum and the implications of those rules. Consider supplementing or changing those rules to address specific business concerns, such as the time within which arbitration must be commenced, the arbitrator selection process, and any discovery parameters.
Enforcement By Or Against Non-Signatories
There are only five recognized theories to bind a non-signatory to an arbitration agreement: 1) incorporation by reference;7 2) assumption;8 3) agency;9 4) veil-piercing/alter ego;10 and 5) estoppel.11 In Katsoris, the Southern District of New York held that a corporate parties’ successor-in-interest (non-signatory) was bound by an agreement to arbitrate, as was the plaintiff (non-signatory) who had negotiated the work-for-hire agreement for his yet-to-be formed foundation;12 however, a non-signatory entity which clearly benefitted from the work-for-hire agreement but did not receive a “direct benefit” therefrom could not be compelled to arbitrate.13
Third-party beneficiaries may enforce arbitration agreements, but whether a non-signatory is a third-party beneficiary entitled to enforce arbitration is a threshold issue of arbitrability for the courts to decide.14
Takeaway: Know the rules for binding non-signatories to arbitration agreements, and carefully consider the parents, subsidiaries, and third-party beneficiaries of the parties and agreement(s). Specifically name such parties and, if possible, require their signatures on the arbitration agreement(s), and incorporate the arbitration clause into related agreements.
Class Action Waivers
Class action waivers in arbitration agreements have long been upheld by the United States Supreme Court.15 In a May 21, 2018 5-4 decision, SCOTUS resolved a Circuit split to side with the Second, Fifth and Eighth Circuits by holding that class action waivers in arbitration agreements are not precluded by the rights to collective action granted by the National Labor Relations Act (NLRA).16 While there are a few legislative prohibitions of pre-dispute arbitration agreements and/or waivers of rights and remedies in the employment context,17 class action waivers are otherwise valid and might operate to preclude the assertion of smaller claims by foreclosing the economies of a class action.
Takeaway: Including class action waivers in arbitration agreements could prevent the assertion of smaller claims against your business.18
Internet-Based Agreements and Consent
Internet contracts have been found valid where “the user takes some action demonstrating that [she has] at least constructive knowledge of the terms of the agreement, from which knowledge a court can infer acceptance.”19
“Clickwrap” or “click-through” agreements require users to click “I agree” after users are presented with terms and conditions of use, in contrast with “browse-wrap” agreements which post terms and conditions via “hyperlink” on a website.20 “Scroll-wraps” require users to scroll through terms before clicking “I agree,”21 and “sign-in wraps” advise users that they are agreeing to terms of service when registering or signing up for services. While Clickwrap agreements are routinely upheld because users must affirmatively assent to terms of an agreement, browse-wrap agreements receive closer scrutiny.22 Nevertheless, the Second Circuit has held that “a reasonably prudent user knows that the text that is highlighted in blue and underlined is a hyperlink to another webpage where additional information will be found.”23
Takeaway: Language and consent buttons in web-based agreements should be very clear, and best practices should include using clickwrap (rather than hyperlinks) to disclose the terms of consent to arbitration.
Arbitrability is frequently contested where a case involves multiple contracts, particularly when the contracts present conflicting forum selection clauses. Generally, “’a broad arbitration clause in an agreement survives and remains enforceable for the resolution of disputes arising out of that agreement subsequent to the termination thereof and the discharge of obligations thereunder’ unless a merger clause in a subsequent agreement serves to supersede the prior agreement to arbitrate.”24 “Where a later contract includes only…general language in its merger clause, the clause does not terminate a requirement to arbitrate issues that arose under a prior agreement.”25 However, where there is “a showing of specific intent for a subsequent contract to supersede a prior agreement to arbitrate, the later contract’s language controls.”26
In Mumin v. Uber Techs., Inc.,27 the Court compelled arbitration notwithstanding that two separate agreements provided that courts in San Francisco would have “exclusive jurisdiction” over disputes arising out of the parties’ agreement, citing the rationale that “it may be necessary to file an action in court to enforce an arbitration agreement, or to obtain a judgment enforcing an arbitration award, and the parties may need to invoke the jurisdiction of a court to obtain other remedies.”28
Mere choice of law provisions are not considered forum selection clauses, let alone “mandatory” or “all-inclusive” forum selection clauses, for the purposes of overriding arbitration clauses.29 Moreover, settlement agreements which settle arbitrable claims but contain merger clauses and conflicting forum selection clauses are not subject to arbitration in actions for breach of the settlement agreement.30
Takeaway: Ensure that forum selection clauses are consistent across contracts most likely to be implicated in a single dispute. For example, employment agreements, NDAs, Confidentiality Agreements, and Work-For-Hire Agreements all may be implicated if an employee steals trade secrets.
Conclusion and Takeaways
While this article does not address the pros and cons of arbitration versus litigation, businesses are well-advised to carefully consider those advantages and disadvantages when drafting and/or negotiating forum selection clauses. To the extent that businesses have decided to use arbitration clauses in their agreements, they should at a minimum:
- Know the applicable rules in the selected forum and the implications of those rules;
- Expressly provide whether court(s) or the arbitrator(s) should address threshold issues of arbitrability, rather than rely upon incorporation by reference of a forum’s rules as determinative of that issue;
- Confirm that forum selection clauses are consistent across contracts likely to be implicated in a single dispute;
- Ensure that the language and consent buttons in web-based agreements are very clear, and use clickwrap rather than hyperlinks to disclose terms;
- Consider including class action waivers.
Forum selection clauses are powerful tools which, if carefully considered and crafted, can save businesses significant time and money. Because such provisions are usually noncontroversial when the parties are negotiating material business terms, that is the best time to consult with litigation counsel to ensure that the clause is properly drafted, consistent with related agreements, and makes good business sense.
- Pincaro v. Glassdoor, Inc., No. 16-civ-6870, 2017 WL 4046317 (S.D.N.Y. Sept. 12, 2017), quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).
- Port Auth. Of N.Y. and N.J. v. 2 World Trade Center LLC, No. 451362/17, 2017 WL 2255598, *4 (N.Y. Sup. Ct. May 23, 2017) (citations omitted).
- Mumin v. Uber Techs., Inc., 239 F. Supp.3d 507 (E.D.N.Y. 2017) (enforcing delegation clause and compelling arbitration); Matter of Monarch Consult., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 47 N.E.3d 463 (N.Y. 2016) (same).
- Mumin, 293 F. Supp.3d 507; Katsoris v. WME IMG, LLC, 237 F. Supp.3d 92, 97 (S.D.N.Y 2017) (invocation of AAA Rules in the work-for-hire agreement “serves as clear and unmistakable evidence” that the parties agreed to delegate the threshold issue of arbitrability to the arbitrator)
- See, e.g., Vectra Capital, LLC v. Cosgrove, No. 656751/16, 2017 WL 2900482 (Sup. Ct. N.Y. Co. July 6, 2017) (where LLC Agreement provided for expedited arbitration before a single arbitrator “administered by JAMS,” the court determined that the parties had not intended to delegate the issue of arbitrability to JAMS because the LLC Agreement provided only for arbitration of certain disputes); Garthon Business Inc. v. Stein, 31 N.Y.S.3d 19, 25 (1st Dep’t 2016) (court determined arbitrability where narrow arbitration clause conflicted with enforceable forum selection clauses in a separate agreement relevant to dispute).
- Kai Peng v. Uber Techs., Inc., 237 F.Supp.3d 36, 45 (E.D.N.Y. 2017) (“whether Plaintiffs assented to the Services Agreement, and therefore to the arbitration clauses, is a matter for the Court to decide notwithstanding the delegation clause”).
- “A non-signatory may be bound by an arbitration agreement when it has entered into a separate contractual relationship with a signatory that incorporates the existing arbitration clause.” Nat’l Union Fire Ins. Co. of Pittsburgh v. Beelman Truck Co., 203 F. Supp.3d 312 (S.D.N.Y. 2016) (citations omitted).
- “[I]n the absence of a signature, a party may be bound by an arbitration clause if its subsequent conduct indicates that it is assuming the obligation to arbitrate.” Clarke v. Upwork Global, Inc., No. 17-cv-560, 2017 WL 1957489, *5 (S.D.N.Y. May 10, 2017), quoting Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 776-77 (2d Cir. 1995).
- Agency requires a showing that the signatory was a fiduciary of the non-signatory and/or that the signatory acted pursuant to the non-signatory’s direction or control. Spano v. V&J Nat’l Enter., LLC, No. 16-cv-06419, 2017 WL 3738555 (W.D.N.Y. Aug. 30, 2017), appeal docketed, No. 17-3055 (2d Cir. Sept. 28, 2017); Trina Solar US, Inc. v. JRC-Servs. LLC, 229 F. Supp.3d 176, 180 (S.D.N.Y. 2017) (although contract did not explicitly state that agent was signing on behalf of principal, “the facts taken together” show that signatory was acting within scope of its authority as agent); but see AGCS Marine Ins. Co. v. Hymel & Assocs., No. 1:16-cv-6899, 2017 WL 2729093 (S.D.N.Y. June 22, 2017), appeal docketed, No. 17-2276 (2d Cir. July 25, 2017) (LLC could not be compelled to arbitrate because the signature of its Member and Registered Agent did not indicate that he was signing on behalf of the LLC).
- Piercing the corporate veil to bind a non-signatory requires more than just a showing of shared headquarters or common ownership; rather, there must be sufficient showing of “abandonment of the corporate structure,” an “intermingling of corporate finances and directorship,” or an “abuse of the corporate form” that led to “inequity, fraud or malfeasance.” Spano, 2017 WL 3738555 at *6, citing Bagel Bros. Maple v. Ohio Farmers, 279 B.R. 55, 65 (W.D.N.Y. 2002) and TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 337 (1988).
- “Estoppel of an unwilling non-signatory requires a showing…that the non-signatory ‘knowingly exploited’ the benefits of an agreement with an arbitration clause and derived a ‘direct benefit’ from the agreement.’” Katsoris v. WME IMG, LLC, 237 F. Supp.3d 92, 107 (S.D.N.Y. 2017), quoting AICO Int’l, E.C. v. Merrill Lynch & Co., 98 Fed. Appx. 44, 46 (2d Cir. 2004), quoting MAG Portfolio Consultant, GMBH v. Merlin Bilmed Grp., 268 F.3d 58, 61-62 (2d Cir. 2001). Third-party beneficiaries seeking to enforce an arbitration agreement will be estopped from avoiding the agreement as non-signatories. Spano, 2017 WL 3738555. A non-signatory cannot compel signatories to arbitrate unless the non-signatory also intends to participate in the arbitration. Baker & Taylor, Inc. v. AlphaCraze.Com Corp., 602 F.3d 486 (2d Cir. 2010).
- Id. at 106.
- Id. at 107-1109. “[A]s the Second Circuit has made clear, the question in analyzing estoppel is not whether the non-signatory has some relationship to the subject matter of an agreement containing an arbitration provision, but rather whether the benefits of the non-signatory receives derive directly from ‘the agreement itself.’” Id., quoting MAG Portfolio Consult GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). A non-signatory’s receipt of goods under a contract for the sale of goods is a “direct benefit” sufficient to compel the non-signatory to arbitrate. Trina Solar US, Inc. v. JRC-Servs. LLC, 229 F. Supp.3d 176, 180 (S.D.N.Y. 2017).
- Gerszberg v. Li & Fung (Trading) Ltd., 215 F. Supp.3d 282, 290-291 (S.D.N.Y. 2016).
- Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (upholding waivers of collective action procedures for alleged violations of the Fair Labor Standards Act); American Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013) (class action waiver in mandatory arbitration clause with merchants was enforceable, notwithstanding that pursuing individual claims did not make economic sense); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (state law invalidating class arbitration waivers in consumer contracts was preempted by FAA).
- Lewis, 138 S. Ct. 1612 (2018). ______________
- See, e.g., 7 USC § 26(n) (commodity whistleblower rights and remedies may not be waived by presdispute arbitration agreements); 18 USC § 514A(e) (rights and remedies for whistleblower protection of employees of publicly traded companies may not be waived by predispute arbitration agreements).
- 29 U.S.C. §§ 151-169.
- Kai Peng, 237 F. Supp.3d at 47, citing Hines v. Overstock.com, Inc., 380 Fed. Appx. 22, 25 (2d Cir. 2010).
- Meyer v. Uber Techs., Inc., 868 F.3d 66, 75 (2d Cir. 2017).
- Id. at 75, citing Berkson v. Gogo LLC, 97 F. Supp.3d 359, 386, 398 (E.D.N.Y. 2015).
- Eisen v. Venulum Ltd., 244 F. Supp.3d 324, 333-34 (W.D.N.Y. 2017) (citations omitted).
- Id. at 334, citing Goldman, Sachs & Co. v. Golden Empire Sch. Fin. Auth., 764 F.3d 210, 216 (2d Cir. 2014) and Applied Energetics, 645 F.3d at 525 n.2.
- 239 F. Supp.3d 507 (E.D.N.Y. 2017).
- Id., quoting Dream Theater, Inc. v. Dream Theater, 124 Cal. App.4th 547 (2004); but see Applied Energetics, Inc. v. NewOak Capital Markets, LLC,[xxviii] 645 F.3d 522, 525 (2d Cir. 2011) (forum selection clause specifying that disputes “shall be adjudicated” by specified courts was “in direct conflict” with a previous agreement’s mandate that “any dispute…shall be resolved through binding arbitration”).
- Mitsubishi Elec. Corp. v. Westcode, Inc., No. 3:15-cv-505, 2016 WL 3748023 (N.D.N.Y. July 11, 2016) (arbitration clauses in Joint Venture Agreements survived choice of law and merger clauses in subsequent Memorandum of Understanding that restructured the payment terms under the Joint Venture Agreements, although arbitration was not compelled due to extensive litigation).
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Oliver, 681 Fed. Appx. 64 (2d Cir. 2017), citing Applied Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522, 524-26 (2d Cir. 2011) and In re Am. Express Fin. Advisors Sec. Litig., 672 F.3d 113, 133 (2d Cir. 2011).