​The Federal Arbitration Act (FAA) validates agreements to arbitrate disputes, and the Supreme Court has read that broadly to establish a strong public policy in favor of arbitration, and to create a strong presumption in favor of arbitration where there are any doubts or ambiguities in an arbitration agreement.  But a recent Eleventh Circuit case, Calderon v. Sixt Rent a Car, LLC, 5 F.4th 1204 (11th Cir. 2021), held that the FAA only validates arbitration agreements that arise out of the contract of which they are a part.

While most agreements to arbitrate only require that the parties arbitrate disputes that arise out of the contract, there has been a recent trend by some companies to include broad arbitration provisions requiring arbitration of any dispute between the parties, and in some cases even with affiliate companies.  The Calderon decision, however, calls the validity of these broad provisions into question.

The Calderon Case
The plaintiff in Calderon used a popular website, Orbitz.com, to book a rental car in Florida from a rental company named Sixt Rent a Car.  The Orbitz website terms of use, to which the plaintiff had agreed, contained an arbitration clause to arbitrate any disputes that arise out of the services offered by Orbitz.  The plaintiff was satisfied with the Orbitz website and had no claims against that company.

He did, however, bring a claim against Sixt.  He signed a separate agreement with Sixt concerning the car rental, and that, notably, lacked an arbitration clause.  He alleged that he returned the rental car undamaged, but then was charged $700 for damage in an email sent thereafter.  He brought a class action suit for breach of contract and under Florida consumer-protection statutes.
Seeking to avoid suit, Sixt moved to require arbitration of the claims, relying not on its own contract (which lacked an arbitration clause) but on the Orbitz agreement.

Analysis
Since all arbitration is a matter of contract, the Eleventh Circuit first turned to the contractual language.  The Orbitz agreement required arbitration of any “Claims,” defined to include “any services or products provided.”  Sixt argued that such included companies marketing their services through Orbitz, but the Eleventh Circuit held that the better reading was that this only meant services provided by Orbitz, not services provided by vendors through its site.  Although it was not 100% clear, this was the better reading.

Sixt then invoked the Supreme Court’s holding that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983).  The Eleventh Circuit conceded that, if Moses H. Cone applied, it would indeed weigh in Sixt’s favor.

But the Calderon court held that the Moses H. Cone rule only applies to arbitration agreements within the scope of the FAA.  The FAA language validates a “ written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction.”  9 USC 2 (emphasis added).  The emphasized language focuses on disputes that “arise out of” the contract.  “[T]he Act’s—or more accurately, Moses H. Cone’s—strong pro-arbitration canon of construction applies here only to the extent that Marin’s lawsuit against Sixt ‘[aris[es] out of’ his contract with Orbitz.”

In prior cases interpreting similar contractual language, the phrase “arises out of” turns on “whether the dispute in question was an immediate, foreseeable result of the performance of contractual duties.”  The Calderon suit clearly failed this test, as it had little to do with the contractual relationship between Orbitz and the Plaintiff. 

Citing to a concurrence in a prior Ninth Circuit case, the Eleventh Circuit agreed that the FAA simply does not apply to an agreement which does not “arise out of” the contractual relationship.

Implications
Although this issue has in the past only rarely come up, more recently companies have sought to broaden arbitration far beyond the scope of a contract.  For example, in Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. 2020), the Ninth Circuit dealt with a dispute between a customer against a satellite-television company that was a distant affiliate of the wireless service company with whom the customer agreed to arbitrate disputes.  The concurrence held that the FAA does not apply at all to that agreement.

These have been dubbed “infinite arbitration clauses” in a law review article, Horton, David, Infinite Arbitration Clauses, 168 U. Pa. L. Rev. 633, 643, 678–80 (2020), which discusses this new phenomenon and argues that the FAA does not apply where there is no nexus between the contract and the dispute.
It remains to be seen whether other courts will follow the Calderon court, but the plain language of the FAA seems to support its holding, as the FAA by its terms requires some nexus between the dispute to be arbitrated and the contract.

Other Enforcement Avenues
Even if the Calderon holding is accepted, there are two potential exceptions.  First, the FAA itself also validates “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal [to perform].”  Once parties have a dispute, they can agree to submit that to arbitration, and that agreement will be binding, even if the original contract lacked an arbitration clause.  So, the limitation held in Calderon applies only to arbitration clauses in contracts that concern future disputes, not already-existing disputes.

Second, while the FAA does contain that limiting language, many states have their own arbitration statutes with language that differs from the FAA.  Florida, where Calderon arose, provides in its arbitration statute that “[a]n agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.”  Fla. Stat. § 682.02(1).  That arguably would also exclude the dispute in Calderon, as the dispute between Plaintiff and Sixt was not “between the parties to the agreement,” which was only between the Plaintiff and Orbitz.

In contrast, New York law provides that “[a] written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable.”  CPLR § 7501.  California law has almost identical language, providing that “[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable.”  Cal. Civ. Pro. § 1281.  These provisions appear broader than the FAA, and arguably could validate an agreement that does not “arise out of” a contractual relationship.

Takeaways
For parties seeking to include arbitration clauses, particularly those used in standardized mass contracts, Calderon is a warning that the strong pro-arbitration policy of the FAA may not apply to validate that agreement, particularly as it related to disputes far afield from the contractual relationship.

Parties who seek to avoid arbitration should carefully review the relevant contracts and determine whether the dispute indeed “arises out of” the contractual relationship.  

In 2016, Congress passed the Defend Trade Secrets Act (DTSA), which creates a federal private civil cause of action for trade secret misappropriation.  “Misappropriation” is defined to include acquisition, disclosure or “use” of confidential information by one who knows or has reason to know that the information was derived improperly.

While acquisition and disclosure are straightforward actions that can give rise to liability, “use” is a more amorphous concept.  A recent Third Circuit decision, Oakwood Laboratories LLC v. Thanoo (2021), held that the term is to be construed broadly to include any commercially beneficial use.  The information need not necessarily be used for manufacturing a product; the Oakwood Labs. case involved use to advance basic pharmaceutical research.  Reversing the district court, the Third Circuit held that this “use” could constitute a misappropriation of the plaintiff’s trade secret.

This expands the rights of trade secret owners, if they secure their rights.  Conversely, parties involved in using what might be confidential information of others need to be more careful, as the potential for liability has been broadened.

The Oakwood Labs. Case
According to its Complaint, Oakwood Labs. is a technology-based specialty pharmaceutical company focused on hard-to-develop generic and quasi-generic, sustained-release, and small molecule injectable drugs.  It is involved in the “the research and development of sustained release injectable drugs involving microsphere systems.”  Through extensive research, Oakwood developed processes for manufacturing, testing, research, quality assurance, and regulatory compliance.  It takes extensive efforts to maintain these as confidential within its company.

In 1997, Oakwood hired Dr. Bagavathikanun Thanoo as a Senior Scientist responsible for product development, and required him to sign a non-disclosure agreement.  Thanoo worked on developing a generic version of a brand name drug used to treat endometriosis. 

Around 2013, Oakwood entered into discussions with another pharmaceutical company named Aurobindo Pharma USA Inc.  Subject to a non-disclosure agreement, it disclosed some of its trade secret information,.  After talks broke down, Aurobindo continued discussions with Dr. Thanoo.  It hired him, and “within months” came up with a competing product that closely tracked Oakwood’s technology.  Oakwood alleged that its proprietary information was used to jump start Aurobindo’s program, allowing it to achieve in months what otherwise would have taken years to develop.

The Decision
The district court dismissed three of Oakwood’s complaints.  The first two were dismissed for lack of sufficient detail (which the Third Circuit criticized).  The third amended complaint was dismissed for a different reason:  Oakwood's failure to allege misappropriation. According to the district court, Oakwood needed to “show that the Microsphere Project was replicated, that is, that the microsphere technology Aurobindo has been working on has been developed using Oakwood’s trade secrets.”
This was legal error, held the Court of Appeals.  The term “use” does not require that a trade secret be replicated in any way.  Because the term “use” is not defined in the DTSA, then ordinary dictionary definitions apply, and "use" is generally defined to mean “to employ for the accomplishment of a purpose” or to “benefit from.”

In the context of trade secret misappropriation, the term “use” is given broad meaning.  An oft-cited Fifth Circuit decision applying Texas law, Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 450-51 (5th Cir. 2007), which in turn relied on the Third Restatement of Unfair Competition, § 40, states that use includes:

any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant[.] ... Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret ... all constitute ‘use.’”

The Third Circuit embraced this broad definition in construing the DTSA.  “In accordance with its ordinary meaning and within the context of the DTSA, the ‘use’ of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as “assist[ing] or accelerat[ing] research or development.”
Decisions such as Oakwood Labs. expand the scope of protection afforded to trade secrets, and are that much more reason for trade secret owners to take step to secure their rights. 

Section 230 of the Communications Decency Act provides immunity against a wide variety of claims against on-line platforms that host third-party content.  But the section has an explicit exception for “any law pertaining to intellectual property.” 47 U.S.C. § 230(e)(2).

While this exception clearly includes federal copyright, patent and trademark rights, it has been an open question whether it includes state-law intellectual property rights, including the “right of publicity.”  A recent Third Circuit decision, Hepp v. Facebook (3d Cir. 2021), answered both questions in the affirmative, allowing the plaintiff’s right-of-publicity claim to proceed against Facebook. The Third Circuit joined the First Circuit and disagreed with the Ninth on these questions.

While internet platforms enjoy strong immunity from many types of claims, intellectual property is one glaring exception.  The Third Circuit’s decision now widens that exception.
The Hepp decision will likely have a significant effect in on-line advertising.  Individuals claiming violation of their right of publicity on-line now have a powerful weapon when complaining to internet platforms.  In many cases, on-line platforms will to try to avoid liability and order the offending content taken down. 

The CDA
Congress passed the CDA in 1996.  This was largely in reaction to a New York decision named Stratton Oakmont, Inc. v. Prodigy Services Co. (N.Y.Sup.Ct. 1995) which held that because a hosting service had edited the content on its site, it was a “publisher” of the content, and hence liable for any defamation left on the site.  To encourage sites to control content, particular pornography and other offensive content, Congress granted sites immunity from tort claims stemming from third party content on their sites.  Since then, many sites have used this immunity to defend against many types of claims.
From the beginning, however, Congress made an exception for intellectual property claims.  Trademark claims are the most common to use this exception; patent claims rarely are impacted by the CDA.  As for copyright, in 1998, Congress passed the Digital Millennium Copyright Act, which adopts an entire regime to regulate liability by websites.

State Law IP Claims
But what about state-law intellectual property claims?

In Universal Communication Systems, Inc. v. Lycos, Inc., 478 F.3d 413 (1st Cir. 2007), the First Circuit considered a Florida-law trademark dilution claim.  It held that this claim did fall within the intellectual property exception of Section 230.  But it also held that the claim failed under Florida law.
In Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102 (9th Cir. 2007) the Ninth Circuit held that a  state law right of publicity claim was within the exception.  It reasoned that the CDA’s policy goal—to insulate the internet from regulation—would be hindered if federal immunity varied based on state laws. Id. In the Ninth Circuit’s view, only federal intellectual property is exempt.
Finally in Atlantic Recording Corp. v. Project Playlist, Inc., 603 F. Supp. 2d 690 (S.D.N.Y. 2009), the court considered federal and state-law copyright claims.  (Prior to 1978, Congress permitted such claims, and they survive for claims from that period.)  Noting that the provision does not single out federal intellectual property, and that other sections of the CDA do make such a distinction, the Southern District of New York held that state-law intellectual property claims are also subject to the exception.

The Hepp Decision
Karen Hepp is a professional newscaster who hosts FOX 29’s Good Day Philadelphia.  She claims to have a sizable social media following, a considerable positive reputation, and hence her endorsement carries considerable economic worth. 

In 2018, Hepp discovered that a photograph of her taken in a convenience store, without her knowledge, was making its way around the internet.  The image was then used in two different advertisements.  One was for a dating app named FirstMet, which advertised its services on Facebook using Hepp's image.  The ad encouraged Facebook users to “meet and chat with single women near you.”

The second involved a post of the photo to an on-line forum; the Third Circuit affirmed dismissal of those claims for lack of jurisdiction.

On the claim against Facebook, Hepp brought claims under Pennsylvania law for violation of her right of publicity.  The district court relying on the Ninth Circuit, dismissed the claims, holding that only federal intellectual property claims are exempt from CDA immunity.

But on appeal, a divided panel of the Third Circuit held that (1) the IP exception extends to state-law claims, since there is no explicit limitation of the exception to federal laws, which other parts of the CDA do mention explicitly; and (2) right of publicity is a form of intellectual property, since many law dictionaries include it as an example of IP laws. 

Effects of Hepp Decision
While some First Amendment advocates have criticized the decision as impinging on First Amendment rights, this concern appears overblown.  The right of publicity is a relatively narrow right, aimed at protecting the value of someone’s image, name and personality in commercial advertisements. 
Where it will likely have a significant effect is in on-line advertising.  Individuals claiming violation of their right of publicity on-line now have a powerful weapon when complaining to internet platforms.  

A recent Federal Circuit decision, Bot M8 LLC v. Sony Corp. of America (Fed. Cir. 2021) clarified the standard needed to plead claims of patent infringement.  Its ruling also stands as a warning that too much detail can lead to the conclusion that there is no infringement as a matter of law, and thus preclude suit altogether.

The Bot M8 decision holds that while a plaintiff need not plead an element-by-element case of infringement, it must do more than recite the patent and identify the accused device. Rather, it must plead a “plausible” case of infringement (the general pleading standard in federal court), which may vary by the complexity of the case.

As to one of Bot M8’s patents, the plaintiff pleaded so much detail, that review of the pleadings indicated that they were inconsistent with a charge of infringement.  So the Federal Circuit affirmed dismissal of that patent.  But as to two other Bot M8’s patents, the Federal Circuit found that the district court had insisted on too much detail, and reversed the dismissal.

The Bot M8 Case
Bot M8 filed suit against Sony and others in the Southern District of New York, asserting six patents relating to gaming machines and casino, arcade, and video games. That case was transferred to the Northern District of California, where that court “directed” Bot M8 to file an amended complaint specifying “every element of every claim that you say is infringed and/or explain why it can’t be done,” and to purchase and reverse engineer the accused products, if possible. Bot M8 filed a 223-page first amended complaint, which Sony moved to dismiss.

The district court granted Sony’s motion to dismiss four of the asserted patents and denied Bot M8’s motion for leave to file a second amended complaint. (The district court also granted Sony’s summary judgment motion that one claim of a fifth patent was invalid under § 101, which the Federal Circuit affirmed).

On appeal, the Federal Circuit affirmed as to three patents, but reversed as to two.  The pleading standards was central to its decision as to four of the patents.

Pleading Standard For Patent Infringement Cases
How much detail is required in a patent complaint has been controversial for some time.  At one point, the federal rules contained a very terse model patent complaint, Form 18, which the Federal Circuit held controlled patent infringement pleading.  But after that was eliminated from the rules, courts have struggled with how much details is required.  Bot M8 has now brought some clarity.

The starting point is the Supreme Court’s decisions in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atlantic Inc. v. Twombly, 550 U.S. 544, 570 (2007).  The Supreme Court held that a plaintiff must give enough factual allegations to make out a “plausible” claim under the applicable law.   That informs the pleading standard for patent infringement.
 
In the Bot M8 case, the Federal Circuit now further clarified the pleading requirements for patent infringement cases. It reiterated that “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” But it disagreed with the district court’s instruction that a complaint must “explain . . . every element of every claim that you say is infringed and/or explain why it can’t be done.” The Court explained that under Iqbal/Twombly a plaintiff need not “prove its case at the pleadings stage” and is not required to plead infringement on an element-by-element basis.

Rather, the court explained that it is enough “that a complaint place the alleged infringer on notice of what activity . . . is being accused of infringement.”  How much detail is required will depend on the case.  Among the factors a court should consider are (1) the complexity of the technology, (2) the materiality of an element to practicing the asserted claims, and (3) the nature of the allegedly infringing device.

Bot M8’s Mixed Results
As to two of the asserted patents, the Federal Circuit held that the district court had insisted upon too much detail, and reversed the dismissal.  The pleadings, though not as detailed as the district court had insisted, did provide enough detail to make out a plausible case for infringement.
As to another patent, however, the Amended Complaint merely made conclusory allegations that the accused device met all the claim elements, and the court affirmed the dismissal.

As to a fourth patent, the Federal Circuit reasoned that the Amended Complaint contained too much rather than too little, to the point that Bot M8 had essentially pleaded itself out of court.  Bot M8 took a “kitchen sink” approach that revealed pleadings that were inconsistent with the asserted patent claims, rendering infringement not even possible, much less plausible.

Lessons For Infringement Plaintiffs
Patent plaintiffs, like Goldilocks, now have to make sure their pleadings are “just right.”  Too little detail, and the claim can be dismissed as conclusory.  Too much detail, and the Plaintiff risks being inconsistent with the patent claims, in which case a court might conclude that there is no infringement.  The pleadings as to the two patents that were reversed on appeal in the Bot M8 decision are a good starting point as a model for the level of detail that passes muster. 

​In our last newsletter, we discussed the recent decision of the New York Court of Appeals in Freedom Mortgage Corp. v. Engel (2021), which contained two key holdings concerning the six-year statute of limitations as it applies to mortgage foreclosure cases.  The Engel court held (1) the filing of a foreclosure action accelerates all payments on a mortgage and starts the six-year clock for all payments and (2) the voluntary dismissal of the foreclosure action de-accelerates the mortgage, and stops the clock on future payments.

Since Engel, courts in New York have had to deal with new permutations of the statute of limitations in this context.  One open issue is whether termination of the foreclosure action other than through voluntary dismissal has the same effect of de-accelerating the payments.  The Second Department held it does not, while the Second Circuit, applying Engel, indicated in dictum that it would.
Another issue is what if the mortgagor files a foreclosure action, but never serves a summons and complaint on the owner.  The Second Department has held that this still accelerates the loan, and if six years pass, the claim would be time-barred.

Engel is considered a watershed case in the mortgage industry, and certainly has spawned much litigation.  As is the case with many watershed decisions, it resolved one set of issued but then spawned another.

What Kind Of Dismissal De-Accelerates The Loan?
Engel held that a voluntary dismissal of a foreclosure action ends the acceleration, and the statute of limitations clock begins anew on each payment.  What if the foreclosure action is dismissed involuntarily? 

In Everhome Mortgage Company v. Aber (2d Dept. 2021), the Appellate Division considered a foreclosure action where the mortgagor had brought a prior foreclosure action, but that had been dismissed by the court because counsel failed to appear at a court conference.  “[G]iven that the [first-action] acceleration of the mortgage debt was neither invalidated by the court nor revoked by the plaintiff, the Supreme Court properly determined that [the second] action is time-barred.”
In contrast, the Second Circuit in 53rd Street, LLC v. U.S. Bank National Association, (2d Cir. 2021) has indicated that such a dismissal could de-accelerate the mortgage.  There, the mortgagor brought a foreclosure action, and then assigned the note to another bank.  The court dismissed the action for non-appearance.  The new noteholder then sent several letters to the borrower “stating that the loan, which had been previously accelerated by [the] filing [of] a [foreclosure] lawsuit,” was “de-accelerated and re-instituted as an installment loan.”

The district court dismissed the suit as time-barred, but that was before the Engel decision, which was decided while the case was on appeal.  The Second Circuit vacated the dismissal and remanded for further consideration in light of Engel.

The borrower contended that under Engel, only a voluntary dismissal re-accelerates the loan.  The Second Circuit rejected that contention: 

"[T]he Engel opinion did not suggest that such a voluntary discontinuance is the only “affirmative act” that can successfully de-accelerate a mortgage. To the contrary, Engel expressly contemplated other “affirmative acts” that would suffice. See id. at 29, 146 N.Y.S.3d 542, 169 N.E.3d 912 (“For example, an express statement in a forbearance agreement that the noteholder is revoking its prior acceleration and reinstating the borrower’s right to pay in monthly installments has been deemed an ‘affirmative act’ of de-acceleration.”). If 53rd Street LLC’s interpretation of Engel were correct, a mortgagee whose foreclosure action was discontinued in any manner other than by voluntary withdrawal of its complaint—such as involuntary dismissal for some minor procedural issue—would have no way to de-accelerate the mortgage except to refile its foreclosure action for the sole purpose of then immediately withdrawing it. We see nothing in Engel that demands such wasteful formalism."

Given both the dismissal and the later letter to the borrower, there was an open question whether the second bank “clearly, unambiguously, and affirmatively communicated the de-acceleration of the loan within the limitations period.”  That was the issue the district court had to consider on remand.

Loan Accelerates Even If Summons Not Served
Suppose the mortgagor files a foreclosure action, but then never serves the summons and complaint or otherwise prosecute the action.  Does that accelerate the loan and start the statute-of-limitations clock running?

In Wilmington Savings Fund Society, FSB v. Rashed (2021), the Second Department held that it does.  There, the mortgagor brought three actions to foreclose.  The first was voluntarily dismissed.  In the second, it moved for default, but the Supreme Court denied that motion, because it failed to show the borrower had been properly served, a ruling affirmed by the Second Department. 

​In the third action, the Supreme Court dismissed the case as time-barred, which the Second Department affirmed.  Citing to Engel, it held that the mortgage had been accelerated, even though it has not been served on the borrower.   “[T]he subsequent commencement of the [second] action accelerated the loan anew regardless of whether the summons and complaint were served upon the defendants.”  Since the second action was never dismissed or withdrawn, the statute of limitations still ran, and the third case was time barred.

The lesson for lenders is clear:  don’t leave foreclosure actions pending.  If not proceeding with them, then formally dismiss them.