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News: Dropbox Is Adding An Arbitration Clause To Its Terms Of Service

calmediation February 23, 2014 No Comments

Dispute Resolution Terms Incorporate Provisions Popularized By AT&T v. Concepcion

Dropbox, that marvelous tool allowing you to share folders with your other computers, as well as with third parties, has notified its users that it is updating its terms of service, effective March 24, 2014. One change will be the addition of arbitration clauses to Terms of Service and to the Dropbox for Business online agreement.

Here are features of the dispute resolution mechanism:

Begin with informal dispute resolution before bringing a formal proceeding.
Both sides agree to arbitrate to resolve any claims relating to the Terms or the Services through final and binding arbitration – except as set forth under Exceptions to Agreement to arbitrate.
Parties may opt-out of the agreement to arbitrate by submitting an opt-out form.
Arbitration will be administered by the AAA under the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes.
Arbitration will be held in the US in the county where you live or work, San Francisco (where Dropbox is headquartered) or any other location the parties agree to.
Dropbox will pay arbitration fees for claims less than $75,000. If you receive a more favorable award than what Dropbox offers to pay, you get a bonus of $1,000, in addition to the award. Dropbox won’t seek fees and costs in arbitration – unless the arbitrator determines your claim is frivolous.
Exceptions to the arbitration requirement include small claims, or injunctive relief for certain claims.
There is a class action waiver: “You may only resolve disputes with us on an individual basis, and may not bring a claim as a plaintiff or a class member in a class, consolidated, or representative action.”
Additionally: “Class arbitrations, class actions, private attorney general actions, and consolidation with other arbitration aren’t allowed.”
The judicial forum for disputes to which the agreement to arbitrate is found not to apply, other than for small claims actions, will be in federal or state courts in San Francisco.
The Terms are governed by California law except for conflicts of law principles.

As I read through the terms, I wondered what clauses were covered by the opt-out form. The opt-out form provides: “[Y]ou are opting out of the agreement to arbitrate Dropbox’s Terms of services (“Terms”). This opt-out doesn’t affect any other parts of the Terms, including, for example, the controlling law provision or the requirements about in which courts legal disputes may be brought.” The “no class actions” waiver, read literally, applies to more than arbitration, and the opt-out form, read literally, seems to say that even if you opt out of arbitration, you can’t file a class action.

Additionally, if you opt out, and bring a claim in court for greater than $75,000, you (or at least, your attorney) is going to get to see San Francisco – a great city to visit.

Obviously, Dropbox’s attorneys have read AT&T v. Concepcion, and they have drafted the arbitration provisions with the intention that they pass judicial muster. For now, I am going to suspend judgment as to whether every one of the provisions will be enforceable. If you use Dropbox, I urge you to also read the new provisions that will go into effect concerning permissions the user gives to Dropbox, and concerning privacy.

Recommended Reading: Outsourcing Justice – The Rise of Modern Arbitration Laws in America

calmediation February 19, 2014 No Comments

Arbitration Is The Product Of The Reform Era – And The Need For Reform Is Not Over

     The book cover of Outsourcing Justice, Professor Imre Szalai’s history of arbitration in the United States, might lead one to believe that the author will fire a broadside against arbitration today. First, there is the red, white, and blue carton of French fries, with fine print at the bottom: "BY READING THIS LABEL YOU AGREE TO ARBITRATION." That’s just enough to recall and conjure up James v. McDonald’s Corporation, 417 F.3d 672 (7^th Cir. 2003), in which the plaintiff, disappointed purchaser of a game ticket, discovered after-the-fact that she was bound by an arbitration clause. That clause was contained in the rules for the "Who Wants to be a Millionaire" game ("Official Rules"); and, the French fry cartons to which game cards were affixed had language directing participants to see the Official Rules for details. Second, the title, Outsourcing Justice, has a somewhat pejorative ring to it, in a world where “outsourcing” connotes heartless cost cutting.

     In fact, Outsourcing Justice is clearheaded, well written, balanced, and scholarly. Prof. Szalai places the development of arbitration within its historical and social context, while also looking at the important role played by individuals who lobbied to expand the role of arbitration in the 20^th century.

     Before the passage of modern arbitration statutes, arbitration was severely encumbered in the United States, because arbitration agreements could be disavowed before judgment was entered. But the increasing development of interstate and global commerce required that merchants be able to rely with certainty on the validity, irrevocability, and enforceability of arbitration agreements. Also, the sudden end of World War I resulted in a spate of government contract cancellations, making it necessary to find fast and efficient means to resolve contract disputes.

     In particular, Prof. Szalai explores the remarkable role played by Charles Bernheimer, the "Father of Commercial Arbitration." Deeply disturbed by the unethical practice of merchants during the Panic of 1907, a time of economic shock in the country, Bernheimer made it his life’s passion to promote arbitration as an alternative to burdensome litigation. A successful cotton merchant himself, Bernheimer gave generously of his own time and money to promote arbitration. He appears to have pushed for reform out of altruistic motives, rather than for "any selfish or evil motives to strip away rights from unknowing individuals." (p. 91). Bernheimer was a pragmatic idealist.

     Bernheimer’s efforts to promote arbitration, beginning in 1907, encountering a major victory with the passage of New York’s arbitration statute in 1920, and culminating with the creation of the Federal Arbitration Act in 1925, belong to the Progressive Era. Prof. Szalai tells the story of Bernheimer’s intensive lobbying efforts, in the Chamber of Commerce, the New York State Legislature, the American Bar Association, and the United States Congress. While the narrative of lobbying efforts may be a bit of a slog at times, it is also very revealing in its details about how lobbying could once, at its best, be a constructive source of reform, and about how, once upon a time, lawyers and politicians with different opinions could listen to one another’s arguments, and cooperate to produce useful legislation. It is also a story about how one dedicated man, Bernheimer, could make a difference by being persistent, passionate, knowledgeable, and responsive to the concerns of others who would today be called “stakeholders.” For two decades, the resourceful Bernheimer was indefatigable in his commitment, yet found time for summer archeological expeditions, exploring the Southwest.

     Placing the development of arbitration in the context of the Progressive Era, Prof. Szalai notes that consent, efficiency, and faith in a bureaucratic approach were all hallmarks of the Progressive Era – as well as of the movement to spread arbitration. The Federal Arbitration Act created a loose, malleable framework, intended to be a work in progress, and an exemplar of consent, efficiency, and bureaucratic expertise.

     Prof. Szalai argues, however, that the "work in progress" is not yet complete. In the case of arbitration, consent, especially in consumer transactions, is usually a legal fiction. Efficiency is often an elusive goal. And blind faith in a loose procedure may be misplaced – is the system neutral, or does it disadvantage the consumer, the employee, and the class member? Arbitration is not defined in the Federal Arbitration Act. Congress or perhaps the judiciary "should clearly define what is meant by arbitration covered by the law, and address several minimum procedural guarantees in arbitration, and what types of parties or claims should be covered by an arbitration law." (p. 201).

     Outsourcing Justice shows that the development of arbitration case law has strayed from the intent of some of arbitration’s Progressive Era proponents. In the congressional history of the Federal Arbitration Act, early proponents of arbitration intended that it apply to arms-length agreements between merchants, and that small disputes with consumers and employment disputes might not be covered. As case law has developed, however, arbitration has increasingly colonized the areas of consumer and employment law.

     Of course, judges will always look first to the plain language of the Federal Arbitration Act and state statutes, and will only delve deeper into legislative history if they cannot find the answers they want in the language of the statutes. While the legislative history is very interesting, it is often ambiguous, with its meaning contested and elusive.

     Outsourcing Justice also argues that "progressive measures often failed to provide clarity or guidance regarding how to balance [consent and efficiency]." (p. 200). However, on calibrating the balance, Prof. Szalai does not offer much guidance.

     Andrew J. Pincus, the lead attorney for AT&T in AT&T v. Concepcion, 563 U.S. 321 (2011) has said, “Our courts are expensive, overburdened and virtually impossible for nonlawyers to navigate. For these claims, it is arbitration or nothing.” See my June 4, 2012 post. Prof. Szalai has not written a book to engage with this argument, because the province of his book is law and history, not law and economics.

     On a note of optimism – or at least hope – Prof. Szalai concludes, “I hope America’s arbitration laws are about to go through anoth
er period of reform.” (p. 202). That’s the progressive spirit of Charles Leopold Bernheimer, from a time long ago, channeled through the medium of Prof. Imre Szalai.

Mediation/Confidentiality: Mediation Privilege Prevents Admission Of Evidence Of Settlement Discussions, Making It Impossible To Challenge Terms Of Release

calmediation February 6, 2014 No Comments

Here, Release Of Attorneys From Malpractice Claim Resulted In Prevailing Party Status and Substantial Attorney’s Fees Award

In Kim v. Lim, Ruger & Kim, No. B240378 (2nd Dist. Div. 4 Feb. 6, 2014) (Epstein, Willhite, Suzukawa) (unpublished), the Court of Appeal ruled that a couple, who lost a malpractice action, had unambiguously released their attorneys in a written release. As the prevailing party, the attorneys garnered a fee award of $230,803. For more on the bases for the fee award, see the February 6, 2014 post in the California Attorney’s Fees blawg.

For purposes of California Mediation and Arbitration, however, the takeaway is that Plaintiffs were unable to effectively challenge the terms of the release, because the mediation privilege prevented them from introducing parol evidence of mediation discussions. Evid. Code, section 1119.

Arbitration/1281.2: Order Denying Motion To Compel Arbitration Is Affirmed Because Of Risk Arbitration Would Lead To Inconsistent Results

calmediation February 6, 2014 No Comments

Compelling Arbitration Of the Claims Against Appellants Could Result In Conflicting Rulings On Issues Common To All Defendants

Plaintiff Vox sued six defendants, including four former employees, alleging they conspired to “encumber” Vox’s business to the benefit of their planned competing business. The four former employees were parties to arbitration agreements with Vox, and petitioned to compel arbitration. However, two other defendants were not bound by arbitration agreements. The trial court denied the employees’ request to arbitrate, and employees appealed. Vox Entertainment, Inc. v. Carter Reese, et al., Case No. B244812 (2nd Dist. Div. 2 Feb. 5, 2014) (Chavez, Ashmann-Gerst, Ferns) (unpublished).

Under Cal. Code of Civ. Proc. section 1281.2(c), a court may deny a motion to compel arbitration “when (1) ‘[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party,’ (2) the action or proceeding ‘aris[es] out of the same transaction or series of related transactions,’ and (3) ‘there is a possibility of conflicting rulings on a common issue of law or fact.’”

Appellants/employees, who were seeking arbitration with Vox, challenged only the existence of the third prong – possibility of conflicting rulings. Appellants focused on the trial court’s findings that Vox’s claims against two of the six defendants arose independent of the employment agreements containing the arbitration provisions, and were “not intertwined with the contract claims.” However, the Court of Appeal explained that the trial court’s findings were simply made to establish the first of the three 1281.2(c) requirements – that third parties were involved. Because there was evidence “that compelling arbitration of the claims against [four] appellants could result in conflicting rulings on factual and legal issues common to all [six] of the defendants,” the trial court’s order denying the petition to arbitrate was affirmed.

COMMENT AND PRACTICE TIP: I note that there is no discussion in the opinion of whether California law or the Federal Arbitration Act was referenced in the contracts as governing their interpretation and enforcement. The result could be different here, depending on which law governs. Unlike California arbitration statutes, the FAA does not contain an “inconsistency” provision providing express discretion to deny a motion to compel arbitration. If the contract is governed by the FAA, then the arbitration provision is more likely to be enforced among those parties that have signed the arbitration agreement, notwithstanding the risk of inconsistent results in litigation with third parties who are not bound by arbitration. See my October 10, 2012 post on Mastick v. TD Ameritrade, Inc. and Mastick v. Oakwood Capital Management, Inc., LLC, 209 Cal.App.4th 1258 (2012) in which Justice Gilbert answers the question – when does federal preemption apply? – with a resounding “it all depends.”

If you are concerned when drafting an arbitration clause that future disputes with third parties could lead to inconsistent results, and economic inefficiency, unless everything can be resolved in a judicial forum, then consider making California law govern the clause. However, if you really, really want to arbitrate, notwithstanding the risk of inconsistent results if there is litigation with a party not bound by the arbitration provision, then consider making the FAA govern the arbitration clause.

Arbitration/Waiver/References: First District, Div. 4 Agrees Defendants Waived Right To Arbitrate, And Appointment Of Referee Is Moot

calmediation February 1, 2014 No Comments

By Considerably Expanding Scope Of Complaint, Party Might Have Reopened Opponent’s Right To Arbitrate That Has Been Waived – But It Didn’t Happen Here

Defendants appealed the trial court’s denial of their petition to arbitrate, and their appeal from an order appointing a referee. Boschetti v. Pacific Bay Investments, Inc., et al., No. A134195 (1st Dist. Div. 4 Jan. 30, 2014) (Rivera, Ruvolo, Reardon) (unpublished). The Court of Appeal affirmed, because defendants had delayed, and in the meantime, “substantially invoked” the machinery of litigation.

The interesting point is that by amending his complaint and substantially expanding the scope of his claims, plaintiff risked reviving defendant’s right to arbitrate: “See Keating v. Superior Court (1982) 31 Cal.3d 584, 607, reversed on another ground in Southland Corp. v. Keating (1984) 465 U.S. 1 [where amended complaints “considerably expanded” scope of pleadings, trial court could properly find lack of waiver of right to arbitrate interrelated claims in original complaints].).” (Slip Op. at 8). However, the expansion of claims here did not revive a right to arbitrate, because there were arbitrable claims in the earlier complaint that were waived, and the same properties were involved in the earlier complaint and the amended complaint.

As for the order appointing the referee, that is an interlocutory rather than an appealable order. Defendants failed to ask that their appeal be treated as a writ of mandate, and the Court of Appeal declined to treat the appeal as a writ. End of story, for now.