By Gerald L. Maatman, Jr., Tyler Z. Zmick, and George J. Schaller
Duane Morris Takeaways: In Kashkeesh v. Microsoft Corp., No. 1:21-CV-03229, 2023 U.S. Dist. LEXIS 109559 (N.D. Ill. Jun. 26, 2023), Judge Manish Shah of the U.S. District Court for the Northern District of Illinois granted Microsoft’s motion to compel arbitration regarding the claims of two Uber rideshare drivers asserting a class action under the Illinois Biometric Information Privacy Act. The Court held that Microsoft could enforce the rideshare contracts as a third-party beneficiary and that Microsoft did not expressly waive its right to arbitrate.
For employers seeking to compel arbitration, especially in lawsuits involving third-party beneficiary situations, this decision is instructive in terms of how courts determine waiver of the right to arbitrate and third-party beneficiaries in agreements with arbitration clauses, particularly where the agreement provides a description of a class to which a party belongs and does not identify the beneficiary by name.
Case Background
Plaintiffs Emad Kashkeesh and Michael Kormorksi (collectively “Plaintiffs”) were drivers for the ridesharing and food delivery company Uber. Id. at 2. In addition to providing other identifying information for Uber as part of their work, Plaintiffs were required to take pictures of their faces through Ubers “Real Time ID Check” software. Id. Uber’s software utilized Microsoft’s Face Application Programming Interface to identify drivers. Id. After Uber drivers, like Plaintiffs, submitted their photographs to Uber’s software program, Microsoft’s software extracted facial biometrics to create geometric templates, and compared these templates with information corresponding to the employees, for identification. Id at 2-3.
Plaintiffs claimed that they never agreed that Microsoft could capture, store, or disseminate their facial biometrics, were never told that Microsoft was gathering their information, and Microsoft never published a policy about the company’s retention and deletion of biometric information. Id. at 3. However, Plaintiffs contracted with Uber to work as rideshare drivers and signed the Company’s 2020 Platform Access Agreement (“Uber Agreement”). Id. Within the Uber Agreement, an arbitration clause required Plaintiffs to arbitrate any dispute between Plaintiffs and Uber, and “any other entity [other than Uber] .. arising out of or related to our application for use of an account to use [Uber’s] Platform and Driver App as a driver.” Id.
In May 2021, Plaintiffs filed a lawsuit alleging Microsoft violated the Illinois Biometric Privacy Act. Id. Microsoft removed the case on June 16, 2021, and filed its own motion to dismiss for lack of personal jurisdiction. Id. Plaintiffs filed a motion to remand two of their claims. Id. Microsoft opposed Plaintiffs motion, but Plaintiffs’ motion was granted, and some of Plaintiffs’ claims remained in federal court with limited jurisdictional discovery conducted. Id. Subsequently, Microsoft’s motion to dismiss was denied on December 13, 2022. Id. at 3-4. On that same day, Uber informed Microsoft for the first time that Plaintiffs agreed to the 2020 Uber Agreement. Id. at *4. In answering Plaintiffs’ complaint, Microsoft asserted that Plaintiffs claims had to be arbitrated. In February 2023, Microsoft filed its motion to compel arbitration. Id.
The Court’s Decision
The Court granted Microsoft’s motion to compel arbitration. In doing so, the Court provided standards on compelling arbitration such that Microsoft was required to show “(1) an agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal by the opposing party to proceed to arbitration.” Id. at 1. Declaring that there was no dispute that the arbitration agreements are valid and enforceable, the Court turned to the following issues: (i) whether Microsoft (a non-signatory) can enforce the contracts as a third-party beneficiary, and (ii) whether Microsoft waived its right to compel arbitration. Id.
On the third party beneficiary status, the Court noted the strong presumption against “conferring contractual benefits on non-contracting third parties.” It reasoned that this presumption could be defeated if “the contract strongly suggest[s] that it applies to third parties – so strongly as to be practically an express declaration.” Id. at 5. Further, the Court opined that “to create a third-party beneficiary, the contract must have been made for the direct benefit of the third party, an intention which ‘must be shown by express provision in the contract identifying the third party beneficiary by name or by description of a class to which the party belongs.’” Id. Additionally, the third party bears the burden of showing the parties to the contract intended to confer a direct benefit. Id.
The Court determined that Microsoft was identifiable as a third party beneficiary “by description of a class to which the party belongs,” because Microsoft was “an entity,” and engaged in a dispute with Plaintiffs “arising out of or related to Plaintiffs use of an account to use [Uber’s] Platform and Driver App as a driver.” Id. The Court disagreed with Plaintiffs’ argument that this “entity” class was not defined specifically enough. Id. at *6. The Court also rejected Plaintiffs’ contention that the Uber Agreement limited any arbitration claims to Uber, its agents, and employees because the agreement included an address for Uber where plaintiffs could demand arbitration in writing. Id. The Court held “the agreement in this case also expressly identifies third parties for whom no contact information was provided, so including contact information for an entity is not a conclusive sign of the parties intent to confer third-party beneficiary status.” Id. at 7. Therefore, the description of the class at issue showed the agreement applied to third parties, including Microsoft, and the parties intended to confer a direct benefit on Microsoft, so Microsoft could enforce the Uber Agreement. Id.
As to waiver, the Court reasoned the right to arbitrate a dispute can be expressly or implicitly waived. Id. However, based on the circumstance here, the Court ruled that there was no evidence that Microsoft expressly gave up its right to arbitrate with these Plaintiffs. Id. Instead, the Court analyzed whether Microsoft implicitly waived its right to arbitrate by considering the totality of the circumstances and whether Microsoft acted inconsistently with arbitration. Id. at 8. The Court considered Microsoft’s diligence in seeking arbitration and whether Microsoft participated in litigation, substantially delayed its request for arbitration, participated in discovery, and whether Plaintiffs were prejudiced by the delay in seeking arbitration. Id.
Microsoft argued that “a party can only be found to have given up its right to arbitrate if it had actual knowledge of that right. Id. at 9. The Court disagreed based on the notion that a party could implicitly waive or forfeit the right to arbitrate by failing to adequately investigate the possibility of arbitration. Id. Indeed, the Court stated “a reckless indifference to a right to arbitrate and the use of judicial dispute resolution instead is a strong sign that a party wasted time, and should not be allowed to invoke the right that it could have asserted sooner.” Id. at 9. Looking to the chronology of the case, the Court reasoned that Microsoft demonstrated a lengthy delay in waiting to mention arbitration until January 2023 when its initial removal of the case to federal court occurred in June 2021. Id..
The Court also did not find Microsoft’s arguments persuasive that it could not have done more to figure out whether Plaintiffs agreed to arbitrate. Id. at 10. In part, the Court looked to the sophistication of both Microsoft and Uber, as well as, the diligence in communications between the two companies. Id. The Court determined that “Microsoft’s lack of diligence, removal, and (limited) participation in litigation [were] all inconsistent with arbitration.” Id. at 11. Additionally, the ruling on Microsoft’s motion to dismiss made factual findings that may be relevant to Microsoft’s defenses and Microsoft’s delay in seeking arbitration had led to some “limited prejudice to [P]laintiffs.” Id. Even still, the Court recognized “while invoking judicial process presumptively waives a right to arbitration, that presumption can be rebutted in abnormal cases” and it considered this case to be “one of them.” Id.
In sum, the Court noted that Microsoft could have been more diligent in identifying its right to arbitrate this dispute and Microsoft’s participation in litigation was not merit-based, so while the case was “a close call,” the Court held that “the context here does not demonstrate an untimely assertion of a right amounting to forfeiture.” Id. at 14. Therefore, the Court granted Microsoft’s motion to compel arbitration.
Implications For Employers
Employers that are confronted with litigation involving arbitration claims and beneficiary classifications should take note that the Court in Kashkeesh relied heavily on the description conferring benefits to Microsoft and that Microsoft’s actions demonstrating it waived its right to arbitrate was a “close call” for the Court. Further, from a practical standpoint, employers should carefully evaluate any entered agreements with other parties that contain arbitration clauses to ensure it is properly conferred a benefit to arbitrate.