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Arbitration Denial, Confirmation, and Immunity: Four Additional Cases from Sotomayor's Second Circuit (Web)

Below are three more of U.S. Supreme Court nominee Sonia Sotomayor’s Second U.S. Circuit Court opinions on arbitration.

Check here for our initial Tuesday take and background on the judge, and here for additional cases posted Wednesday.  This post was updated Friday morning, May 29, from the original May 28 post.
We also have included a significant arbitration case in which Sotomayor wasn’t the opinion author, but part of a unanimous panel that found that a class action arbitration provision was invalid in a credit card case under the Federal Arbitration Act.

The three cases below authored by Sotomayor are unanimous three-judge appellate panel decisions.  In one of the cases, the judge showed sympathy to plaintiffs facing Internet boilerplate requiring arbitration.  She ruled that no contract was formed by the web interface that would subject the plaintiffs to arbitration. 

In a second case, Sotomayor ruled that arbitration testimony made by a police chief is immune from civil liability in a post-disciplinary hearing civil rights suit brought by a police officer formerly under the chief's command.

In a third, she confirmed an American Arbitration Association award despite allegations of arbitrator misconduct, where the association asked the parties to re-supply the arbitrator with hearing exhibits that were lost.

Here are the remaining cases:

Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002) : In a class action suit involving the limits of Internet contracts, Sotomayor upheld a New York federal district court’s refusal to compel arbitration where the ADR clause was posted on a web page located below a button allowing users to download free software.

The plaintiffs had downloaded a Netscape plug-in that they claimed provided Netscape with records of their Web activities, and filed suit for the privacy breach.

“In order to resolve the central question of arbitrability presented here,” wrote Sotomayor on behalf of a unanimous Second Circuit panel, “we must address issues of contract formation in cyberspace. Principally, we are asked to determine whether [the plaintiffs-appellees], by acting upon defendants’ invitation to download free software made available on defendants’ webpage, agreed to be bound by the software’s license terms (which included the arbitration clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had scrolled down the webpage to a screen located below the download button.”

The opinion backs the lower court, agreeing “that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants’ invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs’ bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms.”

So, finding no reason to send the case to trial on contract formation, and that the downloaders weren’t put on notice of the license’s arbitration terms, Sotomayor confirmed the denial of the motion to compel arbitration, and stayed the litigation.

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Rolon v. Henneman, 517 F.3d 140 (2d Cir. 2008): This case stems from a civil rights action under 42 U.S.C. §1983.  The  claim, by a Wallkill, N.Y., police officer alleged that his former police chief falsely accused him of misconduct, and caused him to suffer humiliation and economic loss because of the supervisor’s testimony at an arbitration.  

The issue was whether the supervisor police chief was immune from civil liability after offering allegedly false witness testimony at the arbitration of the police disciplinary hearings. The appeals court held that the chief was protected by absolute immunity from civil suit as a “testifying witness” under §1983, because although the hearing was not in court, the nature of the arbitration was materially indistinguishable to that of formal judicial proceedings, and because the chief performed the same function as a judicial witness.

Sotomayor indicated that the arbitral proceeding encompassed “nearly identical procedural safeguards,” citing Briscoe v. Lahue, 460 U.S. 325, 342 (1983), thereby ensuring that the arbitration and the witnesses’ participation sufficiently mirrored the judicial process.  

The unanimous Second Circuit opinion concluded by affirming the district court's dismissal of the police officer's claim.

* * *

Circle Indus. USA Inc. v. Parke Constr. Group Inc., 183 F.3d 105 (2d Cir. 1999):
Circle Industries entered into a joint venture with Parke Construction Group in order to begin Atlanta area construction projects.  After the two entities voluntarily dissolved their venture, Parke claimed Circle wrongfully diverted funds.  An American Arbitration Association arbitral panel later concurred.  The panel issued a binding award for Parke that survived Circle's state court motion to vacate.

After the case was removed to federal court based on diversity, Circle moved to remand the action to state court.  The district court denied Circle's motion to remand and entered a final judgment confirming the challenged arbitration award. 

The issue for the three-judge circuit court panel was whether Circle met its burden to show that the arbitrator was guilty of misconduct that caused prejudice.  Circle's complaint about arbitrator prejudice arose because the American Arbitration Association requested additional copies of certain evidentiary exhibits from both parties after the originals were misplaced. 

After receving Parke’s exhibits, the association told Circle that the evidence would be forwarded to the arbitrator.  Circle demanded to inspect the exhibits before they were forwarded. Soon after, Parke notified the association that no additional exhibits other than those originally presented during the arbitration were forwarded, and that Parke would object if Circle submitted any new exhibits to the American Arbitration Association. 

Without responding to either Parke or Circle, the arbitrator issued a decision for Parke.

Writing for the unanimous Second Circuit panel, Sotomayor concluded that Circle was given a full opportunity to review Parke's exhibits as they were entered into evidence during the arbitration hearings. Circle provided no evidence that Parke included new or improper materials to the association.

Therefore, the Sotomayor opinion concluded, Circle failed to establish a violation of the American Arbitration Association procedural rules sufficient to require vacatur of the panel's award.

But Sotomayor also handed the losers a small victory: she returned about $2,500 in attorneys fees to Circle, holding that the district court’s grant of fees to Parke for successfully defending the case's removal to federal court ran contrary to a federal statute.

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Sotomayor also is willing to invalidate an arbitration clause that she believes doesn’t measure up to FAA standards.  For In Re: American Express Merchants' Litigation, Italian Colors Restaurant, 554 F.3d 300 (2d Cir. 2009) decision, Sotomayor voted with Circuit Judges Robert D. Sack and Rosemary S. Pooler, who was the opinion author, to invalidate a merchants’ group class action waiver provision in an arbitration agreement as unenforceable under the FAA.  

The opinion found that enforcement would grant the credit card company de facto immunity from liability under modern antitrust law, and reversed a lower court decision allowing arbitration on those issues to proceed.  

The ruling preserves the right of the class of merchants who accept American Express credit cards to resolve their disputes in court.  But the appeals court stopped short of labeling all class action waiver provisions in arbitration agreements per se unenforceable.  It opted for a case-by-case approach. Sotomayor cited the approach used by the 11th Circuit as “something like the correct approach”:                                      

[T]he enforceability of a particular class action waiver in an arbitration agreement must be determined on a case-by-case basis, considering the totality of the facts and circumstances. Relevant circumstances may include, but are not limited to, the fairness of the provisions, the cost to an individual plaintiff of vindicating the claim when compared to the plaintiff's potential recovery, the ability to recover attorneys' fees and other costs and thus obtain legal representation to prosecute the underlying claim, the practical affect [sic] the waiver will have on a company's ability to engage in unchecked market behavior, and related public policy concerns. [Dale v. Comcast Corp., 498 F.3d 1216, 1224 (11th Cir. 2007).]
--Russ Bleemer, Editor, Alternatives, and Andrew Gange, CPR Intern