United States: A Company May Not Be Bound To Agreements Compelling Arbitration, Such As The Terms Of Service Of A Product Or Service, Merely Because Its Attorney Assented To Those Terms For The Purposes Of Conducting A Pre-Filing Investigation

Abstract

A New York court granted a patent owner's motion for a preliminary injunction staying an arbitration imposed by a mandatory arbitration clause included in the Terms of Service of the alleged infringing app. The alleged infringer argued the arbitration clause applied based on the patent owner's lawyer assenting to the Terms of Service when signing up for the app as part of his pre-filing investigation under Rule 11 of the Federal Rules of Civil Procedure.  The court held that if the patent owner provided evidence, such as an affidavit, showing that the lawyer signed up for the app and agreed to the Terms of Service for purposes of his Rule 11 obligations, it will likely succeed in avoiding arbitration and grant a permanent injunction. 

Background

Perry Street makes an online-dating app, SCRUFF.  When downloading and signing up for SCRUFF, a user agrees to the app's privacy policy and Terms of Service (TOS) via a “browsewrap” agreement which posts the terms and conditions on a website accessible by hyperlink and which do not require the user to expressly assent. SCRUFF's TOS include a mandatory arbitration clause to resolve any dispute arising out of or relating in any way to use of the service provided under the app.

Jedi's lawyer sent Perry Street a letter accusing Perry Street's SCRUFF app of infringing Jedi's patent. The letter stated that Jedi's lawyer investigated the nature and extent of use of Jedi's patented technologies by Perry Street, and attached a copy of Jedi's patent as well as a representative claim chart. Perry Street subsequently filed a declaratory judgment action of non‑infringement, and six weeks later amended the complaint to add a second declaratory judgment claim that the parties were required to arbitrate their dispute under the SCRUFF TOS. Perry Street argued that Jedi agreed to the SCRUFF TOS, which included the arbitration clause, when Jedi's lawyer signed up for the service.

Jedi counterclaimed that Perry Street infringed its patent and sought damages and injunctive relief.

Jedi thereafter moved for a preliminary injunction seeking to either enjoin or stay the arbitration, which the court found was akin to a permanent injunction request. In support of its motion, Jedi argued that the actions of Jedi's lawyer in investigating a potential patent infringement claim were carried out under a duty imposed on the lawyer by the Federal Rule of Civil Procedure 11.

Perry Street filed a cross-motion to compel arbitration and to stay the patent-infringement proceedings until conclusion of arbitration, arguing that Jedi's lawyer was acting as an agent of Jedi when assenting to the TOS. Perry Street filed a separate motion to stay the case pending resolution of its motion to compel arbitration.

After evaluating the Federal Arbitration Act, relevant precedent, and the evidence in the case, the court granted Jedi's motion for a preliminary injunction staying the arbitration and provided the parties with time to develop evidence in support of Jedi's motion for a permanent injunction and Perry Street's cross-motion to compel.

The Perry Street Decision

To obtain a preliminary injunction, the moving party must establish it is likely to succeed on the merits, likely to suffer irreparable harm in the absence of preliminary relief, the balance of equities tips in its favor, and an injunction is in the public interest.

Focusing on likelihood of success on the merits, the court explained it had to determine whether Jedi and Perry Street entered into an agreement to arbitrate when Jedi's lawyer downloaded the SCRUFF app and (passively) assented to the TOS.

Perry Street argued the court should answer the question affirmatively because, according to Perry Street, Jedi's lawyer was acting as Jedi's agent when assenting to the browsewrap TOS. The court, however, found that agency status was not determinative and explained that the mere retention of a lawyer does not create an agency relationship. Jedi's lawyer could only bind Jedi under principles of agency if he had the authority to act on behalf of Jedi with respect to that agreement. Thus, there had to be evidence that Jedi intended to consent to the TOS through the actions of its lawyer.

Jedi, in turn, argued it did not intend such consent. Instead, Jedi argued its lawyer signed up for SCRUFF and assented to the TOS as part of his pre-filing obligations under Rule 11 of the Federal Rules of Civil Procedure.  Rule 11 imposes an affirmative duty on lawyers to conduct a reasonable inquiry into the facts and law before filing a pleading, and in the context of patent litigation the Rule 11 requirements are even more stringent.

After summarizing the cases Jedi cited to argue precedent supported its position that attorneys (or even employees of companies) do not bind their clients (or employers) to arbitration when they do not act as agents when assenting to a TOS agreement, the court denied the request for a preliminary injunction.

The court then highlighted an important difference between those cases and the present case: Jedi did not provide evidence, such as an affidavit, from its lawyer attesting that he was carrying out his Rule 11 obligations signing up for the app and assenting to the mandatory arbitration clause under the TOS. Nevertheless, the court opined it cannot ignore that Rule 11 obligations exist, and that a lawyer who signs a pleading attests that he or she has engaged in an independent investigation and satisfied those responsibilities.  The court held that Jedi would likely prevail on the merits of an application for a permanent injunction if it provided evidence that its lawyer signed up for SCRUFF for Rule 11 purposes.

Strategy and Conclusion

Companies should be aware whether its agents are entering into binding agreements to arbitrate, such as TOS. The actions of an attorney or even an employee working on behalf of company, however, are not necessarily binding on the company, unless the company provides authority to that attorney or employee to enter into the agreement as an agent of the company.

Originally Published by Finnegan, December 2020

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