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Beyond The Legalese

Supreme Court Makes It Easier To Waive Arbitration Rights

12/6/2022

 
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The Federal Arbitration Act makes contractual agreements to arbitrate disputes enforceable.  But these rights, like any contractual rights, can be waived.  It often happens that a party to such a contract will spend months or years litigating before invoking an arbitration provision.  A court may conclude that the party has waived its right to arbitrate.

A recent Supreme Court decision, Morgan v. Sundance, Inc. (2022) has made it easier to find a waiver in this situation.  Many Courts of Appeal applied a specific test for arbitration clauses, requiring a showing that another party has been harmed or prejudiced before a waiver will be found.  In the Morgan case, that lead the Eighth Circuit to find no waiver.
The Supreme Court in Morgan rejected that law, holding that waiver is not determined by arbitration-specific rules, but by the general law of waiver, which does not require a showing of prejudice. It noted that while the FAA does embody a strong federal policy to enforce arbitration agreements, that policy “is to make “arbitration agreements as enforceable as other contracts, but not more so . . . The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”  There is thus no requirement to show prejudice.

The Morgan decision did not specify what standard to apply to determine waiver, and lower courts have been divided as to what standard now applies.  In 2010, the Second Circuit adopted a three-prong standard to determine waiver, with courts considering:  “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.”  La. Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d Cir. 2010).  After Morgan, should courts apply that standard, only omitting the third prejudice prong? Or, should they completely discard it in favor of a more general standard for waiver of rights under a contract, i.e., whether the contractual right was “knowingly, voluntarily and intentionally abandoned?”     

In Herrera v. Manna 2nd Avenue LLC (S.D.N.Y. 2022), the court was unsure about this question,  but avoided it by holding that under either standard, there was no waiver.   One New York court concluded that under Morgan’s reasoning, the general waiver standard applies.  Deng v. Frequency Elecs., Inc. (E.D.N.Y. 2022)  Another held that the Second Circuit standard, minus the prejudice requirement, should still apply.   Carollo v. United Cap. Corp. (N.D.N.Y. 2022).  So the precise standard to apply for waiver remains unclear.

What is clear, however, is that now a party that fails to assert a right to arbitrate as early as possible may lose it.  As one court observed:  “The judicial system was not designed to accommodate a defendant who elects to forego arbitration when it believes that the outcome in litigation will be favorable and then suddenly change course and pursue arbitration. The waiver doctrine exists to prevent parties from invoking the judicial process and thereby defeating the key purpose of arbitration: saving the parties’ time and money.” 

Court Of Appeals Resolves Uncertainty As to Application of Engel Decision In Mortgage Foreclosure Cases

12/6/2022

 
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We previously wrote about the landmark Court of Appeals decision in Freedom Mortgage Corp. v. Engel (2021), which dealt with application of the statute of limitations in mortgage foreclosure decisions.  Since Engel, courts have grappled with its application in various circumstance.  See our prior article here.  A recent Court of Appeals decision, Everhome Mortgage Co. v. Aber (2022) resolved one such issue.

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. However, courts were split as to whether an involuntary dismissal also deaccelerates the mortgage and stops the clock running on the statute of limitations.  The Second Department held that the second part of Engel does not apply to involuntary dismissals, while the Second Circuit has held it does. 

In Everhome Mortgage, the Court of Appeals sided with the Second Department.  That case involved a second foreclosure action that was held time-barred.  The lender had filed a prior action (which accelerated the debt under Engel), but that first action was dismissed without prejudice, based on the lender’s failure to appear for a court conference.  The lender waited over six years from the filing of the first action to file a second.  Agreeing with the Appellate Division, the Court of Appeals held that the action was time-barred, as the involuntary dismissal did not de-accelerate the loan. 

Sale of Mailing List Does Not Violate Right of Publicity – Unless Sample Is Used To Promote The Sale

12/6/2022

 
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Many businesses compile databases of information about their customers or website users, and these can be very valuable to other businesses seeking to market to the same consumer base.  But does sale of such information violate the right of publicity of the persons listed? A recent decision, Huston v. Hearst Communications, Inc., (7th Cir. 2022), addressed this issue.

Elizabeth Huston is a subscriber to Good Housekeeping, published by Hearst, and alleged that Hearst violated here right of publicity under Illinois law by offering for sale and selling mailing lists that identified its magazine subscribers, by name, address, “gender, age, ethnicity, income, political party, religion, and charitable donation history,” among other personal attributes.ouHouse
 
The Seventh Circuit rejected her claim because under Illinois law, to sustain such a claim, the person’s identity has to be used “for commercial purposes.”  In that case, her identity and other information were not used to promote a product (the mailing list), but consisted of the product itself.   It distinguished prior decisions where a sampling of the personal information was used to promote access to a larger database, and the right of publicity might well be infringed. “It is not enough for Huston’s name and other information to appear on or within a product. Her identity must help sell something—whether it is that product or a separate product or service.”

In a later decision, Hoffower v. Seamless Contacts, Inc. (N.D.Ill. 2022), a website came out on the wrong side of this distinction.  The plaintiff alleged that the defendant operates a websites that advertises that in return for a paid subscription, a subscriber will receive access to profiles of individuals with personal information.  The website offers potential subscribers a free trial that allows them to search for, view, and download a limited number of profiles, until they have expended all their “credits.” She further alleged that in response to a search for her name, Seamless displayed search results showing her personal information, a counter showing how many credits remained in the free trial, and an “upgrade” button that promoted the trial user to purchase a subscription to obtain more credits.

​The district court held that this was sufficient to state a claim for violation of her right of publicity, because access to her profile as a free was used as a promotion to encourage potential customers to purchase a subscription to the entire database.  Her profile was thus being used separately from the “product,” the entire database.
Thus while mere sale of a database that includes personal information will likely not violate a right of publicity, the use of portions or samples of a database to promote sales and subscriptions to the whole will do so. 

Supreme Court Rules That Discovery Not Available To Aid Foreign Private Arbitration

9/6/2022

 
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Congress has long allowed federal courts to assist foreign or international adjudicative bodies in evidence gathering. Federal law permits district courts to order testimony or the production of evidence “for use in a proceeding in a foreign or international tribunal.” 28 U.S.C. § 1782.  Can this statute be used to obtain discovery to aid a pending private arbitration in a foreign country?  At the very end of the 2022 term, the Supreme Court ruled that such discovery was not available.  ZF Automotive US, Inc. v. Luxshare, Ltd.  (2022).

The case involved a $ 1 billion business deal between two automotive companies that went sour; the transaction contract required arbitration before three private arbitrators in Munich, Germany to be overseen by a private German arbitration company.  One of the parties filed an application under the statute to obtain discovery in aid of the anticipated arbitration.

The Supreme Court held that this application should be denied.  The statutory phrase foreign or international tribunal means “an adjudicative body that exercises governmental authority.”  A “foreign tribunal” is one that exercises sovereign authority from a single country; and “international tribunal” exercises sovereign authority from multiple countries.  The private arbitration board in Germany did not qualify, so the application for discovery would have to be denied.

​Parties choosing arbitration panels for contractual disputes in a foreign country may wish to take the non-availability of U.S. discovery into account.

Second Circuit Rules That Contract Claim Pre-Empted By Copyright Act

9/6/2022

 
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The Copyright Act pre-empts state law claims where the cause of action involves “rights that are equivalent to any of the exclusive rights within the general scope of copyright”  and which “come within the subject matter of copyright.”  17 U.S.C. § 301.  State law may not offer copyright-like protection.  On the other hand, causes of action that are different from copyright are not pre-empted.  For example, trade secret claims are universally held not to be pre-empted, since the basis of such a claim is breach of confidence.

What if a party enters into a contract binding the other party not to copy materials? For example, an internet platform requires its users to contractually commit not to copy lyrics posted on its site.  That was the issue faced by the Second Circuit in ML Genius Holdings LLC v. Google LLC (2d Cir. 2022).  The Second Circuit held that the claim was pre-empted.

Courts apply a two-part test for pre-emption:  (1) is the subject matter of the cause of action within copyright and (2) whether the rights granted are equivalent to copyright.  The first part was easily met; lyrics are literary works which are copyrightable.  The question, though is, whether a breach-of-contract claim is “equivalent” to copyright.

Most courts look to see whether the state law claim has an “extra element” that makes it “qualitatively different” from a copyright claim.  ML Genius argued that contract law requires mutual assent and valid consideration.  The Second Circuit rejected that argument, because it would create a per se exemption from copyright pre-emption.  Rather, it held that a “holistic” approach must be applied, which in that case meant that the rights were equivalent, since the contract basically barred copying the lyrics.

This decision stands in sharp contrast to the Seventh Circuit’s decision in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).  There, Judge Easterbrook wrote that such contract claims are not pre-empted:

Rights “equivalent to any of the exclusive rights within the general scope of copyright” are rights established by law—rights that restrict the options of persons who are strangers to the author. Copyright law forbids duplication, public performance, and so on, unless the person wishing to copy or perform the work gets permission; silence means a ban on copying. A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create “exclusive rights.”

A number of Circuits, including the Fourth, Fifth, Eighth, Ninth, Eleventh and Federal Circuits, agreed with the Seventh Circuit, i.e., that because contract claims involve private arrangements limited to parties to the contract, they are not “equivalent” to copyright, which protects the work against copying by the world.

ML Genius Holdings has petitioned the Supreme Court for a writ of certiorari, so the issue may be clarified.  In the meantime, parties that rely on contracts to bar copying or exploitation of certain materials, especially software, should be wary that these contracts may not be enforceable.  

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