MEDIA

October 11, 2019

Immunity, Web-Based Contracts, Fraud and Breach Claims

Published in: New York Law Journal | volume 262

This column reports on several significant representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Raymond J. Dearie held that the New York State Board of Law Examiners was not immune from a suit brought by a disabled plaintiff under §504 of the Rehabilitation Act. Judge Nicholas G. Garaufis denied a motion to compel arbitration where the web-based contract did not clearly display the relevant links. And Judge Carol Bagley Amon dealt with a motion by Turing Pharmaceuticals and Martin Shkreli to dismiss claims of fraud and breach of contract brought by a former employee.

Sovereign Immunity

In T.W. v. New York State Board of Law Examiners, 16 CV 3029 (Sept. 8, 2019), Judge Dearie rejected defendant’s claim of Eleventh Amendment immunity in a case alleging discriminatory conduct under the Rehabilitation Act, 29 U.S.C. §794 et seq. Because the Board is a unit of New York’s Unified Court System (UCS), which receives federal funds, the state had waived immunity.

Plaintiff alleged that the Board discriminated against her by denying accommodations for bar exams in 2013 and 2014, in violation of the Rehabilitation Act and Title II of the Americans with Disabilities Act (ADA), 42 U.S.C. §12131 et seq. The Board moved to dismiss, arguing that as an entity of New York state it is immune from private suits brought by individuals in federal court.

As Dearie noted, “the same legal standards and remedies apply to claims under Title II of the ADA and the Rehabilitation Act[.]” Slip op. 4. Plaintiff therefore has to prevail on only one of the two claims to survive the motion to dismiss. If sovereign immunity does not bar the Rehabilitation Act claims, the court need not reach the constitutional question raised by the ADA claim-specifically, whether Title II is a valid exercise of Congress’ authority under §5 of the Fourteenth Amendment. Slip op. 3-4, 13.

Accordingly, Dearie turned to the Rehabilitation Act claim. Section 504 prohibits discrimination against the disabled “under any program or activity receiving Federal financial assistance.” 29 U.S.C. §794(a). Congress “clearly expressed its intent to abrogate states’ Eleventh Amendment immunity for violations of Section 504 … ,” and the Rehabilitation Act conditions federal funding on a waiver of immunity. Slip op. 2.

Plaintiff’s waiver argument based on the Board’s “indirect” receipt of federal funds did not prevail. Slip op. 5-8. “The Board is not a recipient of federal funds because it no longer accepts federally funded vouchers as payment for candidates’ bar exam or attorney registration fees and only benefits economically from federal funds that are used to reimburse individuals for those fees.” Slip op. 13. But the state did waive immunity, subjecting the Board to liability under the Rehabilitation Act, because the Board is not an independent state agency, but rather a “program or activity” of New York’s UCS, which directly receives federal funds. In reaching this conclusion, the court “look[ed] at how state law defines or characterizes the Board’s relationship with UCS.” Slip op. 8. Article VI of the New York State Constitution establishes the judicial branch as the Unified Court System. New York’s Judiciary Laws assign responsibility to the Court of Appeals for regulating admission to practice. The Court of Appeals appoints the members of the Board of Law Examiners, prescribes rules for the Board, and sets compensation for the Board’s members. The Board “is a part of New York’s judicial branch and operates as an ancillary agency of the Court of Appeals.” Slip op. 9. Detailing the Board’s many administrative ties with the Court of Appeals and the UCS (slip op. 8-12), Dearie found a clear legislative intent “that the Board would function under the supervision of the Chief Judge and the Court of Appeals” (slip op. 10).

In short, “under the Rehabilitation Act, the Board is a ‘program or activity’ of New York’s judicial branch, UCS, which has waived sovereign immunity for all of its operations by voluntarily accepting federal funds to support some of its activities.” Slip op. 13.

Web-Based Contracts

In Arnaud v. Doctor’s Associates Inc., d/b/a Subway, 18 CV 3703 (EDNY, Sept. 9, 2019), Judge Garaufis denied defendant’s motion to compel arbitration, finding there was no agreement to arbitrate.

Plaintiff brought a class action alleging that defendant Subway violated the Telephone Consumer Protection Act “by using an automated telephone texting system to send unsolicited and unauthorized marketing text messages” to the cell phones of plaintiff and other class members. Moving to compel arbitration, defendant contended that plaintiff signed up to receive text messages and reaffirmed his consent.

Plaintiff’s receipt from Subway stated that if he took a survey, he would get free offers or discounts. Plaintiff took the survey and provided requested personal information, but says he never consented to receive promotional text messages. To receive offers, plaintiff clicked an “I’m In” button, which defendant contends included plaintiff’s agreement to receive text messages. On the webpage where customers sign up to receive text offers there were two links, one of which was labeled “T&Cs” and the other “Privacy.” The T&Cs link led to a document titled Terms and Conditions that included a Choice of Law and Dispute Resolution paragraph requiring binding arbitration in Bridgeport, Conn. Plaintiff alleged that after he disclosed information to Subway, he began to receive frequent annoying text messages from Subway. The messages continued to come, even though plaintiff texted “STOP”.

Under the Federal Arbitration Act, arbitration agreements are considered valid, irrevocable and enforceable, unless the court finds that a valid agreement to arbitrate does not exist. Garaufis first considered whether the parties agreed to arbitrate. New York law applied because plaintiff was a citizen of New York and allegedly received unlawful text messages from defendant while in New York. Nor did there appear to be any conflict between the law in New York and the law in Connecticut. For a contract to form, the parties must show sufficiently definite “manifestation of mutual assent” to indicate that they agree on all material terms. In connection with web-based contracts, New York courts look at the design and content of the relevant interface to determine whether the disputed contract term was presented in such a way as to put the party challenging that term on “inquiry notice.” Slip op. 12. Where the website is clear and uncluttered with “temporally coupled” hyperlinks, assent is more likely to be found, and where the relevant language is not conspicuous, and there are numerous links and buttons and other materials, assent is doubtful.

The webpage here was cluttered. The link was “not particularly conspicuous in size or font” and did not include language clearly directing users to the Terms and Conditions. There was “little or no notice to the user that he might be bound by additional information contained at that link. “Slip op.15.

Garaufis concluded:

Without language explicitly informing Plaintiff that clicking “I’m in” would constitute agreement to additional terms not contained on the page-and without especially clear and conspicuous display of the relevant links-merely placing the links on the same page as the action button is insufficient to provide inquiry notice. Slip op 16.

Whether plaintiff assented to the Terms of Use by responding to a text message sent to his phone remained a disputed fact.

Former Employee’s Fraud/Contract/RICO Claims

In Painter v. Turing Pharmaceuticals, 17 CV 7558 (EDNY, Sept. 27, 2019), Judge Amon granted in part and denied in part defendants’ motion to dismiss various claims brought by a former employee, Edward Painter, who had purchased securities and entered into various business deals extending beyond his employment with defendant Turing Pharmaceuticals.

The central question was whether Painter’s claims were sufficiently related to his employment with Turing to support the motion by Turing and its principal, Martin Shkreli, to dismiss and/or compel arbitration under his employment agreement, which called for arbitration of employment-related disputes. Amon found the securities fraud claims were not: “Painter’s claims are for securities fraud. He alleges that his investments were induced by material misrepresentations. He was no more susceptible to those misrepresentations than any non-employee.” Slip op. 14. Painter’s state-law fraud and misrepresentation claim, breach of contract/unjust enrichment claims, and breach of fiduciary duty claims all arose from business deals that Painter had reached with Turing apart from his employment. These claims therefore did not relate to or arise out of his employment and also survived dismissal. Slip op. 14-16.

Amon dismissed Painter’s claims under §1962 of the Racketeer Influenced Corrupt Organizations Act, 18 U.S.C. §1961 et sec. (RICO). The predicates for these claims were the same acts as Painter’s securities law claims, and §1964(c) provides that, in bringing a civil RICO claim, “no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962(c).” Section 1964(c) continues: “The exception contained in the preceding sentence does not apply to an action against any person that is criminally convicted in connection with the fraud.” Painter argued that this exception applied to his RICO claims because Shkreli had been convicted of securities fraud in 2017. But that conviction was “not for the fraud giving rise to Painter’s RICO claims”, and Amon found it did not qualify for the exception to §1964(c), agreeing with “the thorough opinion of Judge [Victor] Marrero” in Kaplan v. S.A.C. Capital Advisors, L.P., 104 F. Supp. 3d 384, 389 (S.D.N.Y. 2015) (“the exception is ‘only available to those plaintiffs against whom a defendant has specifically been convicted of criminal fraud'”). Slip op. 17 (internal citation omitted).

HARVEY M. STONE and RICHARD H. DOLAN are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.