Dialogue Consulting Pty Ltd v Instagram, Inc
[2020] FCA 1846
•22 December 2020
Federal Court of Australia
Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846
File number: VID 369 of 2019 Judgment of: BEACH J Date of judgment: 22 December 2020 Catchwords: ARBITRATION – stay of proceedings – s 7(2) of International Arbitration Act 1974 (Cth) (IAA) – arbitration agreement – proper law of agreement – scope of arbitration clause – US federal law – Californian state law – whether waiver of right to arbitrate – s 7(5) of IAA – choice of law concerning waiver – application of US law – application of Australian law – waiver established – stay refused
CONTRACTS – internet contracts – standard form contracts – formation of contract – notice of terms – choice of law for contract formation – lex forum – application of Australian law – “clickwrap” agreement – “browsewrap” agreement – “sign-in wrap” agreement – application of US law – actual or putative proper law of agreement – unfair contract terms – statutory unconscionable conduct – application of ss 21, 22, 23 and 24 of Australian Consumer Law (sch 2 to Competition and Consumer Act 2010 (Cth)) – arbitration agreement formed – no basis for statutory voidability – declaratory relief refused
Legislation: Competition and Consumer Act 2010 (Cth) ss 45, 46, 47; sch 2 (Australian Consumer Law) ss 21, 22, 23, 24, 25
International Arbitration Act 1974 (Cth) ss 2D, 3, 7, 8, 16, 39; sch 1; sch 2
California Arbitration and Conciliation of International Disputes Act (Cal Civ Proc Code § 1280 et seq.) §§ 1281.2(a), 1297.161
Federal Arbitration Act (9 USC §1 et seq.) § 3
International Commercial Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (as adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty-fourth meeting) Art II
UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) Arts 1, 7, 8, 16, 34
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Arena v Intuit Inc (ND Cal, No 19-cv-02546-CRB, 12 March 2020)
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Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3) (2020) 275 FCR 57
Be In Inc v Google Inc (ND Cal, No 12-CV-03373-LHK, 9 October 2013)
BHPB Freight Pty Ltd v Cosco Oceania Chartering Pty Ltd (2008) 168 FCR 169
Cabinetree of Wisconsin Inc v Kraftmaid Cabinetry Inc, 50 F 3d 388 (7th Cir, 1995)
Colgate v JUUL Labs Inc, 402 F Supp 3d 728 (ND Cal, 2019)
Cooper v Asset Acceptance LLC, 532 Fed Appx 639 (7th Cir, 2013)
Cox v Ocean View Hotel Corporation, 533 F 3d 1114 (9th Cir, 2008)
Cullinane v Uber Technologies Inc, 893 F 3d 53 (1st Cir, 2018)
Degroma Trading Inc v Viva Energy Australia Pty Ltd [2019] FCA 649
Douez v Facebook, Inc. [2017] 1 SCR 751
Feldman v Google Inc, 513 F Supp 2d 229 (ED Pa, 2007)
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Paramasivam v Flynn (1998) 90 FCR 489
Peterson v Shearson/American Express Inc, 849 F 2d 464 (10th Cir, 1988)
Richards v Ernst & YoungLLP, 744 F 3d 1072 (9th Cir, 2013)
Rinehart v Hancock Prospecting Pty Ltd (2019) 366 ALR 635
Saint Agnes Medical Center v PacifiCare of California, 31 Cal 4th 1187 (2003)
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Sharif v Wellness International Network Ltd, 376 F 3d 720 (7th Cir, 2004)
Sobremonte v Superior Court, 61 Cal App 4th 980 (1998)
Specht v Netscape Communications Corp, 306 F 3d 17 (2d Cir, 2002)
Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2016] 2 Qd R 194
Trina Solar (US) Inc v Jasmin Solar Pty Ltd (2017) 247 FCR 1
Uber Technologies Inc v Heller, 2020 SCC 16
Windsor Mills Inc v Collins & Aikman Corp, 25 Cal App 3d 987 (1972)
Zaltz v JDate, 952 F Supp 2d 439 (ED NY, 2013)
Zamora v Lehman, 186 Cal App 4th 1 (2010)
Z.I. Pompey Industrie v ECU-Line N.V. [2003] 1 SCR 450
Zuckerman Spaeder LLP v Auffenberg, 646 F 3d 919 (DC Cir, 2011)
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Number of paragraphs: 603 Date of hearing: 23 and 24 July 2020 Counsel for the Applicant: Dr O Bigos QC with Mr Z De Kievit Solicitor for the Applicant: Phi Finney McDonald Counsel for the Respondents: Mr A Bannon SC with Dr R Garnett, Mr C Bannan and Ms N Oreb Solicitor for the Respondents: Corrs Chambers Westgarth ORDERS
VID 369 of 2019 BETWEEN: DIALOGUE CONSULTING PTY LTD (ACN 153 007 259)
Applicant
AND: INSTAGRAM, INC.
First Respondent
FACEBOOK INC
Second Respondent
FACEBOOK IRELAND LIMITED (and another named in the Schedule)
Third Respondent
order made by:
BEACH J
DATE OF ORDER:
22 DECEMBER 2020
THE COURT ORDERS THAT:
1.The respondents’ interlocutory application seeking a stay of the proceeding under s 7(2) of the International Arbitration Act 1974 (Cth) be dismissed.
2.The applicant’s cross application seeking declarations and other relief be dismissed.
3.All parties’ costs of the interlocutory applications referred to in orders 1 and 2 be their costs in the cause.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BEACH J:
The principal applicant (Dialogue) seeks injunctive and other relief concerning Dialogue’s access to the social media platforms Instagram and Facebook, although for present purposes I need only concern myself with the Instagram platform.
Dialogue alleges that the respondents:
(a)by restricting Dialogue’s access to Instagram, breached various implied terms of Instagram, LLC’s Terms of Use (Terms of Use);
(b)made various representations to Dialogue, thereby estopping the respondents from terminating Dialogue’s access to Instagram; it is also said that the respondents engaged in misleading or deceptive conduct in contravention of ss 18 and 29 of the Australian Consumer Law (ACL) (sch 2 to the Competition and Consumer Act 2010 (Cth) (CCA));
(c)engaged in statutory unconscionable conduct in contravention of s 21 of the ACL; and
(d)engaged in anti-competitive conduct that contravened ss 45(1), 46(1) and 47(2) to (3) of the CCA.
Contrastingly, the respondents assert that Dialogue has engaged in the unauthorised access and collection of user data from the Instagram platform, including Instagram users’ posts and related media; the jargon used to describe this process is “scraping”. Further, they say that Dialogue has stored that user data on a publicly accessible and unsecured cloud server, thereby subjecting users’ information to potential security breaches. The respondents say that by engaging in this conduct Dialogue has repeatedly breached the Terms of Use. Accordingly, on various occasions, the respondents have revoked Dialogue’s licence to access the relevant website or to use the associated services.
In summary, one of the main issues in this proceeding is whether Dialogue is entitled to access and use the Instagram platform, which depends upon whether Dialogue has breached the Terms of Use or whether the respondents were otherwise entitled to revoke Dialogue’s licence.
The present proceeding was issued on 11 April 2019. Since that time until April 2020, the respondents have submitted to this Court’s jurisdiction and have actively participated in case management procedures and various interlocutory applications in the proceeding.
But the respondents now, belatedly, seek a stay of the proceeding under s 7(2) of the International Arbitration Act 1974 (Cth) (IAA) by reason of an arbitration agreement between Dialogue and Instagram, LLC. The respondents seek to have the proceeding referred to arbitration, with the exception of Dialogue’s claims concerning ss 45, 46 and 47 of the CCA (the competition claims). Predictably, Dialogue opposes that application. Indeed, it denies the existence of a valid arbitration agreement.
It is convenient at this point to set out s 7 of the IAA which provides:
Enforcement of foreign arbitration agreements
(1) Where:
(a)the procedure in relation to arbitration under an arbitration agreement is governed, whether by virtue of the express terms of the agreement or otherwise, by the law of a Convention country;
(b)the procedure in relation to arbitration under an arbitration agreement is governed, whether by virtue of the express terms of the agreement or otherwise, by the law of a country not being Australia or a Convention country, and a party to the agreement is Australia or a State or a person who was, at the time when the agreement was made, domiciled or ordinarily resident in Australia;
(c)a party to an arbitration agreement is the Government of a Convention country or of part of a Convention country or the Government of a territory of a Convention country, being a territory to which the Convention extends; or
(d)a party to an arbitration agreement is a person who was, at the time when the agreement was made, domiciled or ordinarily resident in a country that is a Convention country;
this section applies to the agreement.
(2) Subject to this Part, where:
(a)proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and
(b)the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration;
on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter.
(3)Where a court makes an order under subsection (2), it may, for the purpose of preserving the rights of the parties, make such interim or supplementary orders as it thinks fit in relation to any property that is the subject of the matter to which the first-mentioned order relates.
(4)For the purposes of subsections (2) and (3), a reference to a party includes a reference to a person claiming through or under a party.
(5)A court shall not make an order under subsection (2) if the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.
The respondents say that prima facie there is a valid arbitration agreement that covers the matters in dispute in the proceeding before me save for the competition claims, and therefore the matter should be referred to arbitration. They say that according to the competence-competence principle, it is for the arbitrator to resolve any questions of jurisdiction, including any challenge to the existence of the arbitration agreement, as well as any dispute as to the scope of the arbitration agreement. But in any event they say that even if I were to finally decide whether an arbitration agreement exists, the conditions of s 7 of the IAA are satisfied and therefore I am obliged to refer the parties to arbitration under s 7(2).
As I say, Dialogue opposes the application, principally denying the existence of any arbitration agreement. Further, Dialogue has brought a cross-application asserting that if there is an arbitration agreement, then it should be declared void or unenforceable as in essence involving an unfair contract term or on the basis of statutory unconscionability. If these arguments fail, Dialogue then says that there has been a waiver of the right to arbitrate, and it seeks to invoke s 7(5) of the IAA.
Now these competing contentions of the parties require me to address:
(a)the competence-competence principle;
(b)the relevant choice of law applicable to determining the formation of what I will loosely describe as an internet-formed contract in terms of whether, on the one hand, Victorian law and Australian law should apply to that determination or, on the other hand, whether US federal law or Californian law should apply;
(c)whether, applying the relevant law, an arbitration agreement was formed, and determining the parties and its scope;
(d)whether, if an arbitration agreement was formed, I should accede to Dialogue’s contentions on its cross-application and declare the arbitration agreement (or the relevant term of the principal contract) as being void or unenforceable as an unfair contract term or unenforceable by reason of conduct amounting to statutory unconscionability;
(e)whether the conditions under s 7(2) of the IAA have been satisfied; and
(f)whether, if there is an arbitration agreement and the conditions under s 7(2) have been otherwise satisfied, Instagram, LLC particularly and the respondents generally have waived their rights to rely upon it, so triggering the exception under s 7(5).
It is convenient at this point to say that I have reached the following views in summary.
First, although I accept that generally speaking the competence-competence principle applies, nevertheless I have taken the view that I should go further than just forming a prima facie view as to the existence of the arbitration agreement. I have decided to finally determine that matter now rather than leaving the issue for a Californian arbitrator to decide.
Second, in terms of the choice of law to determine whether an arbitration agreement came into existence, the relevant law is Australian law generally and Victorian law in particular. I am bound by a Full Federal Court authority of which I was a member to so choose.
Third, applying that law, an arbitration agreement was formed between Dialogue and Instagram, LLC such that s 7(2) applies, but subject to s 7(5). Moreover, the scope condition in s 7(2)(b) is satisfied.
Fourth, I reject Dialogue’s cross-application which was premised on my otherwise finding that there was an arbitration agreement. Although the premise is correct, the cross-application nevertheless fails. The relevant provisions of the ACL have not been triggered such as to entitle Dialogue to the relief that it seeks.
I should say here that my second and fourth propositions explain why I have put the competence-competence principle to one side.
Now my conclusions would usually entail that I should order a stay of relevant parts of the proceeding and refer the matter to arbitration under s 7(2).
But in my view Instagram, LLC particularly and the respondents generally have waived their rights to have the matter or relevant parts thereof referred to arbitration. Accordingly, s 7(5), which covers what I will describe as the strong form of waiver, applies. Therefore, no order for a stay under s 7(2) is mandated. But again, in this context I have had to determine the choice of law. Does Australian law and Victorian law apply to determining the question of waiver? If so, in my view there was a clear waiver. Or does US law apply? Now in my view US law applies to determining the waiver question. I will put to one side for the moment whether US federal law applies or Californian state law applies or both. Indeed, on that aspect I have had to embark upon a voyage of discovery which ended up in a sea of contestable propositions concerning which Circuit of the US Court of Appeals was controlling and the tension between US federal law, the different Circuit approaches and Californian state law; perhaps counter-intuitively, the Ninth Circuit is not necessarily controlling in my context. I will return to this topic later. But applying US law, in my view there was a waiver, although my conclusion is less strong than if I was applying Australian law. I should also note that on this latter question I have departed from the expert opinion evidence of the retired United States District Court Judge James Ware, who at one stage had been the Chief Judge, US District Court, Northern District of California; I will use his US courtesy title given his distinguished career. Judge Ware, who was cross-examined before me, could only express admissible views on what the relevant foreign law was concerning waiver, which was quite heterogeneous, rather than its application to the facts of my case. He provided valuable assistance in laying before me the smorgasbord of US jurisprudence on relevant topics from which I have made a selection. But in the application of US law, it was for me to decide how one might deal with the question of waiver, applying US federal law and/or Californian state law.
In summary, and given that I have found against the respondents on the waiver question, their application for a stay under s 7(2) will be dismissed. I should also say that in the way the case was put, if the mandatory stay failed, then there was no independent basis for a discretionary stay; the discretionary stay argument was only put derivatively concerning the competition claims if I otherwise granted a mandatory stay of the balance of the claims. Dialogue’s cross-application must also be dismissed.
For convenience, I have divided my reasons into the following sections:
(a)Background – [23] to [154];
(b)The existence, validity and scope of the arbitration agreement – [155] to [464];
(c)Waiver – [465] to [600]; and
(d)Conclusion – [601] to [603].
Let me also record at the outset my appreciation for the assistance of counsel and their instructing solicitors on these tricky questions; their competing suggested solutions were well thought through and researched.
Let me turn then to the background to the present applications, starting with a discussion of the parties and their pre-litigation dealings.
BACKGROUND
Dialogue is an Australian proprietary company with its registered office in Melbourne, Victoria. Mr Hugh Stephens is the sole director of Dialogue and the sole director, secretary and shareholder of the company that is Dialogue’s sole shareholder.
Although registered in Australia, Dialogue is an international business that targets and has customers all over the globe, including in the United States and in the State of California. Indeed in evidence before me is material demonstrating that Dialogue has publicly represented that it works with about 10,000 customers globally, ranging from small businesses to larger global brands. Moreover, it has represented that its global clients include Disney, E! News, UFC, AMC Networks, MTV, Business Insider, Wish (an American online e-commerce platform) and Voice of America (a US multimedia agency).
Further, in public interviews and news articles, Dialogue has represented that the majority of its customers are located in the US and Europe, its account management team is located in the US, and only at most 15 to 20% of its customers are located in Australia.
Notwithstanding Dialogue’s public pronouncements and marketing paraphernalia, Dialogue sought to portray itself before me as a small business located in Melbourne, with few employees, and with its sole director and shareholder based in Melbourne. It is said that its business is conducted from Australia. Further, it uses the Instagram service on physical Android devices located in its office in Melbourne. Further, it uses a local server. Further, its products are registered as business names in Australia. This more humble description is perhaps closer to reality.
Between 2013 and 2018, Dialogue’s product was called “Schedugram”. In November 2018, Dialogue changed the name of its product to “Sked Social”. Dialogue provides to clients a social media management tool that manages its clients’ planning and publishing of marketing content on Instagram and Facebook. Each client, an Instagram account holder, engages Dialogue to interact with Instagram (or Facebook) on its behalf. As I say, this product is now called Sked Social.
Let me say something about the respondents to the proceeding.
The first respondent is Instagram, Inc. But Instagram, Inc is no longer an active company. On 31 August 2012, Instagram, Inc merged with an acquisition subsidiary of Facebook, Inc that is now known as Instagram, LLC.
The fourth respondent is Instagram, LLC, a company incorporated under the laws of the State of Delaware, which has its principal place of business in California.
The second respondent is Facebook, Inc, which is also incorporated under the laws of the State of Delaware with its principal place of business in California. On or around 7 April 2012, Instagram, LLC was acquired by Facebook, Inc.
The third respondent, Facebook Ireland Limited, is a company incorporated under the laws of the Republic of Ireland. Since about 6 October 2008, Facebook Ireland Limited has been a subsidiary of Facebook, Inc.
The Instagram service was provided by Instagram, LLC until about 14 July 2018. Since that time it has been provided by Facebook, Inc to users in Australia.
In the context of these corporate changes, I will return later to the question of the relevant respondent party to any arbitration agreement with Dialogue, although it would seem to be Instagram, LLC.
(a) The background to the proceeding
Let me now discuss some background to the proceeding.
There are many social media platforms, but the most well-known are Facebook, Instagram and Twitter. A user signs up to the terms and conditions of the relevant platform, and obtains an account and login details. Each of these platforms enable users to publish content to their individual page or profile.
Apparently, the past few years have seen an increase in the use of social media platforms by businesses in order to market their brands and products. In this regard, businesses’ social media activity is generally split into either organic content or paid use of a marketing channel.
Organic content is content that the business does not pay the platform owner in order to post to the platform; examples are a Tweet, a post to its Facebook page or a post to its Instagram profile and feed. Organic content on Instagram appears in the user’s feed as a regular post. Organic content involves some cost to the business, including hiring an individual in-house to create content and manage the channel(s) or paying an agency to manage it on the business’ behalf.
Paid content is similar to organic content but can have extra features. Paid content is advertising that businesses pay the social media platform for, and can take various forms, with the most popular being “in-feed advertisements”, which appear the same as an organic post, with a “sponsored” or “promoted” tag, in consumers’ feeds alongside content from friends or other organisations that they follow.
Now in late 2013, Mr Stephens of Dialogue noticed an increase in demand from Dialogue’s clients to use Instagram as a marketing channel for the clients’ brands and products. Prior to this time, Facebook and Twitter had been the more prominent marketing channels, but he noticed that Instagram was gaining prominence. He also noticed that larger corporate clients were becoming frustrated with the time and effort that they had to invest in order to manage the planning and publishing of organic marketing content on Instagram over a 24-hour period.
Corporate clients sought to publish marketing content on Instagram over a 24-hour time period, because their Instagram feeds were being accessed across the world at all times of the day. Planning and publishing over a 24-hour cycle required the clients to engage many junior staff and to use multiple smartphones and login details. Apparently, corporate clients had been setting alarms on their smartphone at certain times of the day to publish the marketing content manually on their own phones or outsource this to an advertising agency to do by providing login details for the relevant platform on which it wished to publish. Consequently, he considered that there was a commercial opportunity for automation to assist in this process.
In December 2013 and January 2014, Dialogue developed a “software-as-a-service” product to efficiently manage a company’s planning and publishing of organic marketing content on Instagram. The product was initially called “Schedugram”.
The product was comprised of a web-based client “dashboard” and software, smartphones and IT infrastructure, in order to assist clients to advertise and publish content on Instagram. It worked as follows. A client would have an existing Instagram account. The client would engage Dialogue as its agent to interact with Instagram. The product would use the client’s login details to log in to Instagram, select the client’s chosen content, for example, a photo or video and accompanying caption which has been uploaded to the Dialogue’s cloud based storage via the dashboard, and then publish this content on Instagram.
Clients would provide their Instagram login details to Dialogue on a confidential basis, and the details would be kept confidential by Dialogue. The product utilised the client’s Instagram login details to manage the publishing and planning of the customer’s organic marketing content. Instead of the client publishing the content itself, Dialogue did it on its behalf through an automated process, such that content could be published at all times of the day at the client’s choosing.
The product did not involve any reverse engineering of the Instagram application, and it did not use any Android emulator operating on cloud-based servers.
Dialogue first went to market with an initial version of Schedugram in January 2014. The go to market strategy was focused on providing an innovative and unique product to manage the planning and publishing of businesses’ organic marketing content on Instagram.
Dialogue did not target specific industries for its product. However, given that the product was aimed at businesses and brands that used Instagram as their core marketing channel, industries like fashion and retail, media, e-commerce and advertising agencies comprised a significant part of Dialogue’s customer base and revenue.
Dialogue’s product was one of the first products to allow businesses to manage the planning and publishing of organic marketing content on Instagram. The product offered innovative functionality that clients found attractive. Since its inception in early 2014, Dialogue’s user base had grown to approximately 8,500 companies.
To access the product, clients signed up to a standard-form agreement with Dialogue. Dialogue’s clients would pay subscription fees for usage of the product on a recurring monthly or annual basis.
Now prior to engaging Dialogue, the client accepted the terms and conditions of Instagram, and obtained an account and login details. In order to access or use the Instagram service, or to register to use the service or create an account, a user was required to confirm at the point of registration that he or she agreed to the Terms of Use. Instagram published Terms of Use effective on 19 January 2013 (original Terms of Use) and Terms of Use effective on 19 April 2018 (revised Terms of Use).
The original Terms of Use prohibited, inter-alia, Dialogue from soliciting, collecting, or using the login credentials of other users. They prohibited Dialogue from crawling, scraping, caching or otherwise accessing any content on the Instagram service via automated means. Further, they prohibited Dialogue from violating Instagram’s Community Guidelines and encouraging or facilitating others to violate the Terms of Use.
The original Terms of Use required disputes to be determined by arbitration under the American Arbitration Association’s Consumer Arbitration Rules (AAA Rules). The arbitration notice in the original Terms of Use was conspicuous according to the respondents, being set out in all-capital, bold letters at the top of the original Terms of Use in a shaded text box. According to the respondents, every user, including Mr Stephens and Dialogue, who opened various accounts which I describe below, was given an opportunity to opt out of the arbitration provision.
The respondents say that Dialogue agreed to the original Terms of Use when it accessed and used the Instagram service, and did not opt out of arbitration. Contrastingly, Dialogue says that it did not agree to the original Terms of Use.
I will return to discuss the arbitration clause in the original Terms of Use in more detail later. Was there an agreement between Dialogue and Instagram, LLC on the original Terms of Use? If so, did it contain a binding arbitration clause? If so, did such a provision constitute an “arbitration agreement” within the meaning of ss 3(1) and 7(1) of the IAA? I will answer these questions later, although in doing so I may from time to time slip between descriptions of “arbitration term”, “arbitration clause” and “arbitration agreement”. Further, for conceptual purposes, it may also be necessary from time to time to refer to the arbitration agreement as being something distinct from the principal agreement, although the former is of course encompassed within and forms part of the latter.
On 7 October 2010, Mr Stephens created an Instagram account @hughstephens, which was registered to an email address. This was prior to the original Terms of Use.
On 12 January 2014, Dialogue created an Instagram account @schedugram, which was registered to an email address. This was during the period of currency of the original Terms of Use.
On 14 January 2014, an engineer employed to work on Instagram’s developer platform sent an email to Dialogue asserting that it was violating the original Terms of Use by accessing Instagram’s private application programming interface (API) without consent. On that same date, Mr Stephens replied, indicating that Dialogue did not use Instagram’s private API and only used Instagram’s public API for the limited purpose of capturing a link to its clients’ latest post on the platform.
Since at least 14 January 2014, the respondents say that Dialogue had actual knowledge of the Terms of Use, quoting their specific provisions and discussing them at length in correspondence with Instagram’s counsel relating to Dialogue’s alleged violations.
On 17 January 2014, the engineer replied indicating that there was no issue with Dialogue’s use of Instagram’s public API, but that Instagram did have concerns regarding Dialogue’s collection of users’ login information. On that same date, Mr Stephens replied that login information sharing was already commonplace.
On 18 January 2014, the business name “Schedugram” was registered to Dialogue and Schedugram used the domain schedugram.co to provide its service. The @schedugram account made at least six posts between January 2014 and May 2014.
On 25 January and 28 January 2014, the engineer and Mr Stephens further corresponded.
On 2 April 2014, external US counsel for Facebook, Inc and Instagram, LLC, Perkins Coie, wrote to Dialogue stating that its activities were unauthorised under the original Terms of Use, were illegal and must be stopped immediately. Perkins Coie advised that Instagram and Facebook had taken steps to deactivate Mr Stephens’ Instagram and Facebook accounts and that his licence to access Instagram and Facebook was revoked.
On 3 April 2014, the personal Instagram and Facebook accounts of Mr Stephens were deactivated. The Facebook page “Schedugram”, which was linked to Mr Stephens’ Facebook account, was also deactivated.
Between 3 April and 25 June 2014, there was a series of correspondence between Perkins Coie and Dialogue.
On 24 April 2014, further enforcement action was taken against additional Facebook accounts operated by Dialogue or Mr Stephens.
On 2 March 2015, Perkins Coie wrote to Dialogue indicating that, as had been explained in correspondence in 2014, “Schedugram” violated the original Terms of Use by collecting user credentials and Dialogue had no permission to access Instagram or Facebook. Perkins Coie advised that Instagram and Facebook had taken steps to disable Mr Stephens’ accounts, the accounts of Dialogue and its employees.
Now despite those letters Dialogue’s operations were not blocked and its product was able to continue to operate. There were threats of revocation but no actual revocation of its licence. Dialogue heard nothing further after the March 2015 letter. In 2018 the parties’ representatives met to discuss ways of collaborating together, and Dialogue was given approval to access the Facebook API.
Between 3 April 2016 and 24 May 2018, Dialogue published terms of service for the use of Schedugram that provided, inter-alia, that:
You acknowledge and agree that … any access to Instagram (including via the [Dialogue] Service) is governed by Instagram’s Terms of Use.
Dialogue also used the domains schedugr.am and skedsocial.com to provide its service.
On 31 July 2017, Dialogue created the Instagram account @BenSchedugram, which was registered to two email addresses; again, this was during the currency of the original Terms of Use. This account was associated with Dialogue’s primary IP address. The @BenSchedugram account made at least 17 posts between 29 October 2017 and 5 July 2018.
On 31 January 2018, Dialogue created the Instagram account @getskedsocial, which was registered to three email addresses; again, this was during the currency of the original Terms of Use. This account was associated with Dialogue’s primary IP address.
On 11 June 2018, Dialogue created the Instagram account @sked_social, which was registered to an email address. This was during the currency of the revised Terms of Use, which had commenced use by Instagram, LLC on 19 April 2018. I should note that the revised Terms of Use did not contain an arbitration provision.
Now the respondents refer to a number of Instagram accounts created by Dialogue. They were not used for the provision of services to clients, but rather for marketing and testing activities.
In January 2018, Instagram launched its content publishing API (Instagram Content Publishing API) with selected app developers (described as Instagram marketing “partners”). Initially Instagram selected only six partners who were given access to the Instagram Content Publishing API. Since then the number of partners with access to the Instagram Content Publishing API has increased. Many of these partners compete with Dialogue.
Dialogue was never given access to the Instagram Content Publishing API despite expressing a willingness to use it. Dialogue’s product was excluded from the preferred providers who had been selected by Instagram.
The functionality of the Instagram Content Publishing API has evolved since its inception. Initially the Instagram Content Publishing API supported publishing images but did not support videos, locations, user tags, shopping tags, branded content tags, filters or multi-image posts. In contrast, Dialogue’s product supported many of those additional functions.
In February and March 2018, Mr Stephens prepared a product plan to expand beyond Instagram. Initially the product plan was for a series of products/versions in different industries. Later it was revised to be a product plan that remained having one main “interface” that different customers could use. Post the launch of the Instagram Content Publishing API, part of Dialogue’s strategy was to rebuild its core product to support multiple platforms, for example, Facebook, Twitter and Pinterest, which involved rewriting of the original code.
In March 2018, having developed a new product plan and seeing an ongoing opportunity in the market, Dialogue started to further develop the product. Dialogue hired a head of engineering to spearhead the product redesign and develop a range of new features such as its first version of the Instagram analytics module of the product and rewrite of the code to lay the ground work for other social networks. In August 2018, Dialogue commenced work rebranding the product as Sked Social, instead of Schedugram. Mr Stephens thought that dropping “gram” from the product’s name was necessary in order to be seen as a broader tool than merely use with Instagram.
On 29 September 2018, Dialogue received an email from external US counsel for Instagram, LLC, Kilpatrick Townsend & Stockton LLP. The email requested that Dialogue cease use of the name Schedugram because it infringed on Instagram’s trademark. By that time, Dialogue was in the process of rebranding to Sked Social in any event.
On 4 December 2018, Dialogue’s team completed the rebrand to Sked Social. Since then Dialogue has been trading under the name Sked Social. Dialogue published terms of service for Sked Social which provided, inter-alia, that:
You acknowledge and agree that … any access to Instagram (including via the [Dialogue] Service) is governed by Instagram’s Terms of Use.
I should pause here and note the following.
Dialogue’s Terms of Service for Schedugram in effect from 3 April 2016 to 24 May 2018 and produced by Dialogue to the Facebook entities pursuant to a notice to produce (Schedugram Terms), under the heading “Terms of Service” provided that “These Terms of Use (Terms) govern your use of our website located at (including subdomains), the Schedugram service, and any applications provided by us (collectively Service)”. Under the heading “The Service” term 4 provided “You acknowledge and agree that the Service is not affiliated with or authorised by Instagram, and any access to Instagram (including via the Service) is governed by Instagram’s Terms of Use.”
Dialogue’s terms of service for Sked Social in effect from 25 May 2018 to 25 February 2020 and produced by Dialogue to the Facebook entities pursuant to a notice to produce (Sked Social Terms), under the heading “Terms of Service” provided that, “These Terms of Use (Terms) govern your use of our website located at (including subdomains), the Sked Social service, and any applications provided by us (collectively Service)”. Under the heading “The Service” term 4 provided “You acknowledge and agree that the Service is not affiliated with or authorised by Instagram, and any access to lnstagram (including via the Service) is governed by Instagram’s Terms of Use.”
Now a common request from Dialogue’s clients was to offer products for both Instagram and Facebook. In order to offer access to Facebook to Dialogue’s clients, Dialogue went through Facebook’s usual process for obtaining access in October 2018 (app review process). On 24 October 2018, Dialogue submitted its product to Facebook’s app review process.
On 26 October 2018, Dialogue completed providing information to Facebook as part of the app review process. This involved verifying Dialogue’s business entity and the business name “Sked Social”, and providing Facebook access to the Sked Social product so a Facebook developer could login and manually test the system to ensure that Dialogue was using specific permissions and protecting information appropriately.
As part of the app review process, Dialogue accepted Facebook’s Supplemental Terms for Extended Platform Products and its Technology Provider Amendment to Supplemental Terms for Extended Platform Products.
At the conclusion of the app review process, Facebook gave approval to Dialogue for the Sked Social product, and Dialogue was permitted access to the Facebook API.
After approval, Dialogue could post to Facebook pages using the Facebook API. Through the Facebook API, a client would give Dialogue access, via an authorisation process with Facebook instead of providing their login details directly to Dialogue. As Dialogue did not have access to the Instagram Content Publishing API, it was unable to use a similar process for Instagram, so Dialogue continued to use the process of logging in as an agent of the client for Instagram.
On 10 December 2018, Dialogue launched “Sked Link”, a service that let clients build a link into their Instagram bio so that they could direct customers to access relevant information about their posts.
In January 2019, Dialogue requested some additional permissions from Facebook to support location tagging in Facebook posts. On or around 25 January 2019, that additional permission was approved by Facebook after completing another app review process.
In early 2019, the Instagram Content Publishing API was relaunched and included additional features. But it still did not support stories, multi-image posts or shopping tags. Sked Social, by contrast, supported these functions and was a unique feature of Dialogue’s product offering.
On 12 February 2019, without any warning to Dialogue, the domains used for the Sked Social product were banned from Facebook and Instagram. Mr Stephens’ personal Facebook account was also deactivated. This ban initially did not affect Sked Social’s access to the Facebook API for existing customers or Instagram, however Dialogue could not direct new clients to its product as the domains had been banned.
On 13 February 2019, Dialogue received a letter dated 12 February 2019 from Perkins Coie that asserted:
As we explained during our prior correspondence [in 2014], your service violates Instagram’s terms by collecting user credentials and automating access to the Instagram platform without permission. We also explained that, as a result of your violations of the terms, Facebook has revoked your license to access Facebook and Instagram for any purpose.
The letter also stated:
Facebook has deactivated your accounts. We remind you that you have no permission to access Facebook’s or Instagram’s websites and/or to use any of their services, including Facebook’s and Instagram’s APIs. This means that you, your agents, employees, affiliates, or anyone acting on behalf of Skedsocial, or you personally ... may not access Facebook’s and Instagram’s websites, services, platforms, or networks for any reason whatsoever.
On 27 February 2019, Dialogue’s Facebook API access reverted to the mode that had appeared prior to the app review process. All Facebook posts, both past and scheduled, disappeared. Dialogue was able to partially fix this error and was able to access the Facebook API on behalf of some existing customers, but errors persisted and Dialogue’s domains remained blocked.
On 12 March 2019, Dialogue’s Facebook API access again reverted to “development mode” and all Facebook posts, past and scheduled, disappeared for all customers.
Between 13 February 2019 and 9 April 2019, there was a series of correspondence between the parties about the self-help action that had been taken by the respondents, described as enforcement.
(b) The proceeding
On 11 April 2019, Dialogue filed an originating application and an interlocutory application. Those applications named Instagram Inc., Facebook Inc. and Facebook Ireland Limited as respondents (the Facebook entities). Dialogue sought interim and interlocutory injunctions restraining the Facebook entities from terminating the access of Dialogue to Instagram and Facebook.
On 15 April 2019, I heard the application for injunctive relief ex parte. Dialogue had attempted unsuccessfully to effect service of these documents before 15 April 2019. I ordered that the Facebook entities be restrained from taking any action to terminate or suspend Dialogue’s access to Facebook and Instagram (first injunction) until 17 May 2019 or further order. That same day, the Facebook entities became aware that the first injunction had been issued and restored the de-activated accounts to comply with that order.
On 26 April 2019, White & Case, external counsel for the Facebook entities (excluding Instagram, LLC at that time), wrote to the Australian solicitors for Dialogue, Phi Finney McDonald (PFM), reserving all of the Facebook entities’ rights, including in relation to jurisdiction, venue and service.
In parallel, the Facebook entities instructed an Australian law firm, Gadens, to appear in the proceeding. On 16 May 2019, Gadens filed a notice of address for service.
On 3 May 2019, Instagram, LLC was added as the fourth respondent.
On 17 May 2019, the Facebook entities (now including Instagram, LLC) appeared at a case management hearing and consented to orders being made that included that the first injunction would continue until further order, on the condition that the phrase “without any admission on the part of the Respondents” was added to the terms of the injunction. Further, a timetable for the filing of pleadings and for discovery was agreed to.
On 23 May 2019, Dialogue filed an amended originating application and an amended interlocutory application. I will return to say something about pleadings and discovery later. For the moment let me say something about the various interlocutory applications that have been made before me.
Further interlocutory applications
On 18 October 2019, Gadens wrote to PFM to advise that it had recently been ascertained that Dialogue was using automated means to collect user information without Facebook’s permission and storing it in a manner which failed properly to secure and protect the user information. By that letter, Gadens sought confirmation in writing by 22 October 2019 that Dialogue had:
(a)properly secured all user information held on the servers, including the dataset containing user content and Instagram media files;
(b)stopped accessing, and would not in the future access, Instagram and collect media from Instagram without Facebook’s express consent;
(c)maintained a record of, for the purpose of the proceedings, and then deleted media improperly collected from Instagram; and
(d)complied with its obligations under applicable Australian law, including the CCA and the Privacy Act 1988 (Cth).
Dialogue did not provide these confirmations and PFM and Gadens engaged in further correspondence about these matters on 22 October 2019, 28 October 2019, 30 October 2019, 31 October 2019, 4 November 2019, 8 November 2019 and 11 November 2019. The matters were not resolved.
On 14 November 2019, Gadens sent to PFM a copy of a proposed order to vacate or vary the first injunction on the basis of the matters above. PFM did not respond.
On 14 November 2019, the Facebook entities filed an interlocutory application seeking orders to the effect that the first injunction be discharged or that the first injunction be varied to allow the Facebook entities to terminate or suspend Dialogue’s access to Instagram only, leaving in place the injunction in respect of Dialogue’s access to Facebook.
On 14 November 2019, the Facebook entities filed an affidavit of Mr Michael Owens, the solicitor on the record for the Facebook entities, in support of the Facebook application.
On 15 November 2019, case management orders were made in respect of the Facebook application, and subsequently varied to extend the dates into 2020.
Between 18 November 2019 and 16 January 2020, Gadens and PFM engaged in further correspondence about the matters above.
On 19 and 20 February 2020, the Facebook entities filed affidavits of Mr Ryan Tierney and Mr Alistair Agcaoili in support of the Facebook application. These affidavits spoke to the Facebook entities’ concerns relating to Dialogue:
(a)engaging in unauthorised automated data collection from Instagram;
(b)storing its clients’ information, including scraped information, on an unsecured and publicly accessible server; and
(c)not deleting this stored information when a client deletes the information from their account or changes its account settings to “private”.
The hearing of the Facebook application presently stands adjourned.
On 22 January 2020, PFM wrote to Gadens to allege that the Facebook entities had been blocking Dialogue’s clients from accessing their Instagram accounts and informing Dialogue’s clients that sharing their account with a service that “helps them get more likes or followers goes against the Respondents’ Community Guidelines”. On that basis, PFM asserted that the Facebook entities were engaging in misleading or deceptive conduct and in unconscionable conduct. In the same letter, PFM demanded that the Facebook entities, by 23 January 2020, undertake that users’ access to Facebook and Instagram would not be blocked as a consequence of using Dialogue’s product and that the Facebook entities would not inform users, directly or indirectly, that using Dialogue’s product violated or contravened Instagram Community Guidelines. Gadens responded on the same day and requested identifying details of the allegedly blocked Instagram accounts so that the Facebook entities could investigate and respond.
On 23 January 2020, PFM responded that Dialogue would not provide the Facebook entities with details identifying Dialogue’s clients. Gadens responded on the same day, repeating that the Facebook entities could not investigate without the identifying information and that it would be premature for Dialogue to file an application without allowing for a reasonable opportunity to investigate.
On the basis of these matters, on 24 January 2020, Dialogue filed a second interlocutory application, for an order restraining the Facebook entities from terminating, suspending, refusing or limiting the access of their clients to Instagram and Facebook by reason only of the clients’ use of Dialogue’s services (second Dialogue application).
On 28 January 2020, Gadens replied to PFM reiterating the request for identifying information to permit the Facebook entities to investigate.
On 29 January 2020, the second Dialogue application was listed for hearing. The Facebook entities filed an affidavit of Mr Owens in support of their submission that the hearing of the second Dialogue application be adjourned to allow time for technical evidence to be adduced. Dialogue submitted that an interim injunction be in place up to and until the hearing of the second Dialogue application. On 29 and 30 January 2020, Dialogue and the Facebook entities made submissions relating to the grant of an interim injunction. On 30 January 2020, I made orders restraining the Facebook entities until 13 February 2020 or further order from taking enforcement action against Dialogue’s clients (second injunction).
On 19 February 2020, the Facebook entities filed two affidavits in response to the second Dialogue application.
The second injunction has been extended by consent until the hearing and determination of the Facebook entities’ stay application.
On 11 March 2020, Corrs Chambers Westgarth was appointed by the Facebook entities in place of Gadens and filed a notice of appearance.
On 9 April 2020, the Facebook entities filed an interlocutory application seeking a stay of the proceeding pursuant to s 7(2) of the IAA. This is the stay application that I am presently dealing with.
On 24 April 2020, I ordered that the stay application and any cross-application that might be made by Dialogue be heard on 23 and 24 July 2020.
On 25 May 2020, Dialogue filed its cross-application that I have referred to earlier.
The pleadings
Let me now say something about the pleadings in this matter.
Dialogue filed a statement of claim on 28 June 2019, an amended statement of claim on 6 September 2019 and a further amended statement of claim on 3 April 2020.
The Facebook entities filed a defence on 23 August 2019 and an amended defence on 30 September 2019. Notably, their pleadings were silent on the question of any challenge to jurisdiction, reliance on any arbitration clause or the question of any stay. But at this point let me note something else of significance. As I have said, the original Terms of Use, which applied from 19 January 2013 to 19 April 2018, contained an arbitration provision. And as I have said, this was notified in capital letters at the commencement of the Terms of Use and there was a detailed clause set out later. Notably in both the respondents’ defence and amended defence there are express references to the original Terms of Use. Indeed, various clauses are pleaded (see the pleadings at [12]). But there is no reference to or reliance on the arbitration clause. The various versions of the defence are silent. Was that clause overlooked? Or was a choice made not to plead it? The direct evidence is silent. But a natural inference that could be drawn was that a decision was made by the respondents not to plead it. I will return to solve this puzzle later. I should also note here for completeness and again, that the revised Terms of Use, operative from 19 April 2018, contained no arbitration clause. Again, the various versions of the defence pleaded various terms of the revised Terms of Use.
The Facebook entities have not filed any cross-claims in the proceeding against Dialogue or any other person. Now although allowance had been made for such a pleading in my orders of 17 May 2019, that option was not availed of.
Dialogue filed a reply to the amended defence on 15 October 2019.
On 30 August 2019, the Facebook entities issued a request for further and better particulars of Dialogue’s statement of claim filed on 28 June 2019.
Dialogue, having filed an amended statement of claim on 6 September 2019, provided further and better particulars of the amended statement of claim on 17 October 2019.
On 15 November 2019, I ordered that the Facebook entities were to communicate to Dialogue any request for further and better particulars by 22 November 2019 and Dialogue was to respond by 13 December 2019. On 22 November 2019, the Facebook entities wrote to PFM that certain allegations in Dialogue’s pleading remained inadequately particularised. On 13 December 2019, PFM provided further and better particulars. The court dates relating to further and better particulars were extended on 7 February 2020 to 13 March 2020 and 27 March 2020 respectively. No additional particulars were sought by 27 March 2020 by the Facebook entities.
Let me now say something about document requests.
Document production and discovery
On 27 August 2019, PFM wrote to Gadens and requested copies of nine documents referred to in the defence. On 11 September 2019, Gadens produced the documents to PFM.
On 30 August 2019, the Facebook entities issued a notice to produce to Dialogue seeking the production of 36 documents referred to in:
(a)the affidavit of Mr Stephens affirmed on 11 April 2019;
(b)Dialogue’s amended concise statement filed on 23 May 2019; and
(c)Dialogue’s statement of claim filed on 28 June 2019.
On 5 September 2019, PFM responded that Dialogue would require additional time in order to collate the requested documents, and that some of the requested documents were not in Dialogue’s control or had been previously provided to the Facebook entities. PFM and Gadens engaged in further correspondence about these matters on 23 September 2019, 26 September and 11 November 2019.
Let me say something about discovery.
On 17 May 2019, I made case management orders relating to discovery. The dates for compliance were extended on 17 September 2019, 15 November 2019, 19 December 2019, 30 January 2020 and 7 February 2020. These orders required that the parties use their best endeavours to agree the categories of documents for discovery.
On 21 October 2019, the parties exchanged proposals as to the categories of discovery.
On 25 October 2019, Gadens responded to PFM’s letter of 21 October 2019 that the Facebook entities did not agree to several of Dialogue’s proposed categories.
On 31 October 2019, PFM responded, seeking to explain the relevance of several of the discovery categories that they proposed.
On 1 November 2019, Gadens sent a letter to PFM, seeking a response to Gadens’ letter of 21 October 2019. On 4 November 2019, PFM responded that Dialogue did not agree to several of the Facebook entities’ proposed categories.
On 12 November 2019, the Facebook entities issued a further notice to produce to Dialogue seeking the production of three documents referred to in Dialogue’s amended statement of claim dated 6 September 2019 and reply dated 15 October 2019.
On 15 November 2019, I ordered that the Facebook entities file and serve any application for the production and inspection of the documents sought in the first notice to produce and second notice to produce by 7 February 2020.
On 18 November 2019, Dialogue responded to the first and second notices to produce and produced some of the requested documents and made others available for inspection. Dialogue did not produce documents that Dialogue said were not in its control, or in respect of which Dialogue made a claim for confidentiality.
On 7 February 2020, I extended to 15 May 2020 the date by which the Facebook entities may file and serve any application for production. The Facebook entities have not filed any such application.
On 16 March 2020, the orders as to discovery were vacated. The parties have not produced any documents on discovery.
Other matters
On 15 November 2019, I ordered that the proceeding be referred to mediation. On 6 February 2020, the parties participated in a mediation, although they were unable to reach a resolution.
General
In summary, since the commencement of this proceeding, the respondents have taken numerous steps in the proceeding, including filing a defence, an amended defence and an interlocutory application for the discharge of an injunction, opposing an interlocutory application for injunction, filing numerous affidavits, appearing at numerous Court hearings, submitting to various Court orders for discovery and filing of a counter-claim, issuing notices to produce and requests for particulars and attending a Court-ordered mediation. Indeed, for over a year the respondents participated in the proceeding without expressing any intention to rely upon any arbitration agreement. Nor did the respondents make any appearance before the Court conditional upon any arbitration agreement. These matters are all relevant to the waiver question which I will discuss later.
On 9 April 2020, over 12 months after the commencement of the proceeding, the respondents filed an interlocutory application seeking an order to stay the proceeding under s 7(2) of the IAA.
The respondents propose to arbitrate in California by reference to a draft demand for arbitration. The draft demand for arbitration specifies that, if an in-person hearing is to be held, the respondents request that it be held in San Francisco or San Jose, California. The AAA Rules at R-21 allow administrative and case management hearings in the arbitration to be conducted telephonically. R-26 and R-32(b) also permit the arbitration to be conducted remotely, and the arbitrator may allow the parties to present evidence by web conferencing, internet communication, and telephonic conferences. The AAA has published a “Model Order and Procedures for a Virtual Hearing via Videoconference” including guidance for an arbitration to be conducted entirely virtually.
Further, the Consumer Due Process Protocol, which is a statement of fairness principles that applies to all arbitrations under the AAA Rules, requires that in the case of any in-person proceedings, the proceedings should be conducted at a reasonably convenient location for the parties after considering the positions and circumstances of the parties and the dispute.
Principle 7 of the Consumer Due Process Protocol provides:
In the case of face-to-face proceedings, the proceedings should be conducted at a location which is reasonably convenient to both parties with due consideration of their ability to travel and other pertinent circumstances. If the parties are unable to agree on a location, the determination should be made by the [arbitrator].
Further, the “Costs of Arbitration” section in the AAA Rules and the accompanying fee schedule require that, where a business files a demand for arbitration, the business (in this case, the respondents) must pay all administrative fees which includes filing fees, case management fees and hearing fees, the arbitrator’s compensation and expenses, hearing room rental, any AAA expenses, and costs relating to witnesses and evidence produced at the direction of the arbitrator.
THE EXISTENCE, VALIDITY AND SCOPE OF THE ARBITRATION AGREEMENT
(a) The competence-competence principle
The competence-competence principle is a tenet of faith amongst the arbitration set: simply stated, an arbitrator usually has the power to determine his own jurisdiction including any challenge to the validity or existence of the arbitration agreement. So, if prima facie there is a valid arbitration agreement which appears to cover the matter in dispute, then this principle would ordinarily dictate that the matter should be referred to arbitration including any challenges to the existence, validity or scope of the arbitration agreement. And in that eventuality, no finding by the Court on the balance of probabilities that a valid arbitration agreement exists is necessary.
Now praying in aid this principle, the respondents say that any issues regarding the formation, validity or scope of the arbitration agreement should be resolved by the arbitrator and that for present purposes all that I need find on such matters is a prima facie case.
Now Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442 deals with this point, although it concerned a stay application under the Commercial Arbitration Act 2010 (NSW) (CAA). I should note that the decision went on further appeal (Rinehart v Hancock Prospecting Pty Ltd (2019) 366 ALR 635) but that does not affect what I am about to say.
The relevant provisions of the CAA were identical to those under the IAA. Section 8(1) of the CAA provided:
(1)A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests … refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
Section 16 of the CAA provided:
(1)The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.
(2)For that purpose, an arbitration clause which forms part of a contract is to be treated as an agreement independent of the other terms of the contract.
(3)A decision by the arbitral tribunal that the contract is null and void does not of itself entail the invalidity of the arbitration clause.
Sections 8 and 16 of the CAA are enactments of Arts 8 and 16 of the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006 (the Model Law). Now each of those provisions is expressly adopted in the IAA and has the force of law pursuant to s 16 of the IAA; sch 2 to the IAA sets out the Model Law. In addition, ss 7(2) and (5) of the IAA are similar to s 8(1) of the CAA.
As stated in Hancock, an applicant for a stay need only show on a prima facie basis that a valid arbitration agreement exists (at [141] per Allsop CJ, Besanko and O’Callaghan JJ):
Under this approach, the Court does not reach a final view on the balance of probabilities in respect of the matters in s 8, including the scope of the arbitration agreement. If there appears to be a valid arbitration agreement which prima facie covers the matters in dispute, the matter should be referred to the arbitrator to deal with questions of jurisdiction, including the scope of the arbitration agreement.
Hancock affirmed that the competence-competence principle in s 16 is wide enough to encompass an objection to jurisdiction on the basis that no arbitration agreement existed.
I should also say that the competence-competence principle exists under the AAA Rules (R-14(a)); see also the California Arbitration and Conciliation of International Disputes Act (Cal Civ Proc Code § 1280 et seq.) § 1297.161 (Californian Arbitration Act).
Now Hancock has been applied in the context of s 7 of the IAA in Degroma Trading Inc v Viva Energy Australia Pty Ltd [2019] FCA 649. Degroma applied the principles of Hancock to the context of a stay application under s 7 of the IAA in respect of an agreement to arbitrate in a foreign country, similar to the situation here. The claimant opposed a stay in favour of arbitration in a foreign jurisdiction, arguing that no valid arbitration clause existed. O’Callaghan J held that the effect of the competence-competence principle was that a court should only take a prima facie view of the existence or validity of an arbitration agreement on a stay application under s 7 of the IAA. And once the court was satisfied on a prima facie view that an arbitration agreement exists, then a stay should normally be granted, particularly where the attack on the arbitration clause is intertwined with the challenge to the existence of the principal contract. O’Callaghan J concluded that the proceeding should be stayed, because the question of whether the arbitration agreement existed was intrinsically related to and intertwined with the issue of whether the principal contract (containing the arbitration clause) was binding on the parties. It was therefore appropriate that the arbitrator resolve both such issues. The respondents say that the same reasoning applies here and that I should stay the proceeding and allow the arbitrator to decide whether an arbitration agreement was brought into existence in the first place.
The respondents say that the following features of this proceeding support the position that I should follow the approach in Hancock and Degroma in this case and grant the stay application.
First, a valid arbitration agreement exists which prima facie covers the matter in dispute.
Second, the claims pleaded by Dialogue fall within the scope of the arbitration agreement in the original Terms of Use. Further, the arbitration claims contemplated in the “Statement of Claim & Relief Sought” attached to Instagram’s draft demand for arbitration would for the most part appear to fall within the scope of the arbitration agreement in the original Terms of Use.
Third, whether an arbitration agreement was formed between the parties is a matter within the scope of the arbitration agreement. In any event, to the extent that there is a dispute as to its scope, the competence-competence principle requires the question to be referred to arbitration. Further, because the question of whether the arbitration agreement existed is intrinsically related to the issue of whether the Terms of Use were binding on the parties, it is appropriate that both matters be referred to arbitration.
Fourth, the allegation in Dialogue’s cross-application that the arbitration agreement is invalid because it was procured by unconscionable conduct or amounted to an unfair contract term is also intertwined with the issue of the broader application of both the original and revised Terms of Use and the broader claim of unconscionability. The respondents say that these questions should be resolved pursuant to the arbitration agreement, noting that the IAA should be construed so as to facilitate, rather than impede, the process of arbitration. Consequently, it is appropriate that all such questions be resolved by the arbitrator.
Accordingly, the respondents say that all of the claims but for the competition claims should be referred to arbitration, and the proceeding should be stayed pending resolution of that arbitration.
Now Dialogue says that I should proceed to determine the existence and validity of the arbitration agreement, and it denies the application of the competence-competence principle in the present context.
According to Dialogue, critical to Hancock’s reasoning about the construction of s 8 of the CAA was the existence of the competence-competence provision in s 16 of the CAA, both provisions being derived from Arts 8 and 16 of the Model Law respectively.
But in the present case, the respondents seek to invoke s 7 of the IAA, rather than Art 8 of the Model Law. According to Dialogue, no doubt their reason for not seeking to invoke Art 8 is their recognition that such an application would be out of time, because they did not seek a stay before submitting their “first statement on the substance of the dispute”.
But Dialogue says that s 7 of the IAA was not derived from the Model Law. It was derived from Art II(3) of the International Commercial Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty-fourth meeting (the Convention); see sch 1 to the IAA. But Dialogue says that neither the Convention nor s 7 contains any indication that the competence-competence principle applies.
Further, Dialogue says that the Model Law states in Art 1(2), in effect, that Art 16 is a provision which applies “only if the place of arbitration is in the territory of this State”. But Dialogue says that on the respondents’ case, the seat of the arbitration would be in California, such that Art 16 is inapplicable on any view.
In summary, Dialogue says that Hancock, which dealt with s 8 of the CAA in the context of a domestic arbitration, is distinguishable and I should put it to one side.
Further, Dialogue says that in Degroma the arbitration agreement resulted from lengthy negotiations. In considering whether to stay the proceeding under s 7 of the IAA, O’Callaghan J treated s 8 of the CAA as analogous to s 7 of the IAA and on this basis proceeded to apply the competence-competence principle to an application under s 7. But Dialogue says that there was no discussion of the differences between the provisions, or of the absence of a competence-competence provision in the Convention, or of the limitation under Art 1(2) of the Model Law of the competence-competence principle to arbitrations with a seat in Australia. Accordingly, Dialogue says that Degroma is distinguishable. Alternatively, Dialogue says that if Degroma is authority for the proposition that the competence-competence principle under Art 16 applies under s 7 of the IAA, I should decline to follow it.
As a further fall back position, Dialogue says that even if Hancock is applied, that decision does not stand for the proposition that an applicant for a stay need only show on a prima facie basis that a valid arbitration agreement exists. Hancock rejected any rigid taxonomy of labels or approaches. In this respect, it says that how I ought deal with a stay application will depend significantly upon the issues and the context. Now this is a more attractive proposition. Dialogue says that if I were to ask myself the practical question of whether to hear a separate attack on the arbitration agreement or allow the arbitrator to deal with it, then the answer is that I should hear the attack, for the following reasons.
First, Dialogue says that its attack on the arbitration agreement is on specific grounds that relate only to the arbitration agreement, and is not part of a broader attack on the contract. I must say that such a characterisation is more accurate than the respondents’ characterisation.
Second, Dialogue says that the bases for its attack on the arbitration agreement include that it is an unfair contract term under s 23 of the ACL and that reliance on it constitutes unconscionable conduct under s 21 of the ACL. It says that these are matters which classically should be determined by me rather than any foreign arbitral tribunal. I must say that I find this submission attractive.
Dialogue says that I am better placed than a foreign arbitral tribunal to determine the question of unconscionability, which may require, inter-alia, an assessment of standards in Australia and the values and norms recognised by the ACL (see my observations in Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (2020) 275 FCR 57 at [362] to [379]). That is true.
Further, Dialogue says that if the arbitral tribunal were to decide the validity of the arbitration agreement, then the respondents would urge it to apply Californian law. Dialogue says that it may then be deprived of the opportunity to run its arguments under the ACL that the arbitration agreement is void as an unfair contract term and/or unconscionable. Further, Dialogue says that the arbitral tribunal’s failure to apply the ACL could render any award unenforceable under s 8(7)(b) of the IAA or Art 34(2)(b) of the Model Law as manifestly contrary to Australian public policy. I doubt these submissions. I will come back to the “Governing Law & Venue” provision in the original Terms of Use later and discuss the phrase “without giving effect to any principles of conflicts of law”.
Further, Dialogue says that a hearing before me on the existence of the arbitration agreement and on the “proviso question” under s 7(5) will be more efficient. All the evidence is in relating to the existence and validity of the arbitration agreement and on the issue of waiver. I agree with this point as a matter of practicality.
In summary, Dialogue says that I should proceed to determine the existence and validity of the arbitration agreement and the question of waiver because:
(a)the competence-competence principle does not apply;
(b)alternatively, even if the competence-competence principle applies, in the present case the circumstances are such that I should decide the relevant questions finally rather than merely on a prima facie basis.
Let me begin by saying that I would reject some aspects of Dialogue’s submissions as to the application of the competence-competence principle. I can invoke it. But whether I should is a different question. Let me begin by discussing whether I can invoke it.
Now Dialogue argues that the prima facie test, as applied in Hancock, does not apply to stay applications under s 7 of the IAA. Specifically, Dialogue argues that, unlike Art 16 of the Model Law, the Convention does not contain a competence-competence provision, and so there can be no basis for application of the prima facie test to a stay application under s 7. Further, Dialogue also argues that the prima facie test cannot apply in the present case because Art 16 of the Model Law as enacted in Australian law under s 16(1) of the IAA does not apply to foreign-seated arbitrations.
But I reject Dialogue’s arguments.
First, the absence of a competence-competence provision from the Convention is irrelevant. The Convention relates only to the recognition and enforcement of arbitration agreements and awards. It contains no rules on the powers and duties of arbitrators because the Convention is not a law of arbitral procedure, unlike the Model Law. In any event, the object and purpose of the Convention is to maximise enforcement of arbitration agreements, which is consistent with the purpose of the prima facie test.
Second, the fact that Art 16 of the Model Law does not apply to foreign-seated arbitrations is also irrelevant. The key requirement under Hancock for application of the prima facie test is whether a competence-competence provision exists under the procedural law of the seat of arbitration. If such a provision exists, then the foundation for the prima facie test is established.
Here the seat of the arbitration is California, which has adopted a competence-competence provision substantially similar to Art 16 of the Model Law. As stated in the Californian Arbitration Act § 1297.161 “The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement”.
Further, the arbitral rules that the parties have chosen to govern the arbitration, namely, the AAA Rules, also contain a competence-competence provision (R-14(a)):
The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.
Accordingly, the fact that Art 16 of the Model Law as enacted in the IAA does not apply to the arbitration in the present case is immaterial given that the identical provision applies to the arbitration under Californian law.
Further, Hancock held that in the context of a stay application under the CAA for domestic arbitrations, the stay provision in s 8 of the CAA must be read together with the competence-competence provision in s 16 of the CAA. So too in the context of international arbitrations. The stay provision in s 7 of the IAA should also be read together with the competence-competence provision that would apply to any arbitration in the present case, which is in Art 16 of the Model Law, which has been incorporated in Californian law.
Further, in Hancock the Full Court held that the word “finds” in the stay provision in s 8 of the CAA, that is, the court must “refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed”, must be read together with the competence-competence principle. Now the same should hold true for the word “finds” in the stay provision in s 7(5) of the IAA, that is, the court must refer the parties to arbitration unless it “finds that the arbitration agreement is null and void, inoperative or incapable of being performed” (s 7(5)).
Further, Degroma treated s 7 of the IAA as analogous to s 8 of the CAA, and on that basis applied the prima facie test to the stay application under s 7 of the IAA. Moreover, Degroma is analogous to this case because there the competence-competence principle existed under the law of the seat of arbitration (s 30 of the Arbitration Act 1996 (UK)). Similarly, in the present case the competence-competence principle exists under the law of the seat of arbitration.
In summary, I accept the respondents’ argument that the competence-competence principle applies, and reject Dialogue’s submissions to the contrary. But the fact that I could apply the principle does not entail that I should. There are no hard and fast rules. Context is everything. I do not propose to apply the principle for the following reasons shortly put.
First, there are tricky choice of law questions. What law should be applied to determine the existence of the arbitration agreement? I am best placed to answer this. Further, whatever choice is made I now have all bases covered in terms of being fully informed on Australian law, and by Judge Ware on US law, in order to determine (under whichever law applies) whether there is an arbitration agreement.
Second, I now have all the evidence in to make a final assessment on the merits as to the existence of the arbitration agreement. To leave any decision at the lower threshold of the prima facie stage would be a limp effort.
But if I am wrong on a deliberate choice having been made not to take the arbitration point, in my view that does not assist the respondents. Even if I accept the “cock up” scenario, which is usually not a bad explanation for many scenarios of an analogous type, this takes the respondents nowhere. In addition to the matters that I have referred to above supporting an inference of intentional waiver, the steps taken by the respondents during this proceeding lead to the conclusion that there has been an implied waiver of their rights to rely on the arbitration agreement under US law in the sense that with knowledge of the arbitration right the respondents have taken intentional acts inconsistent with that right. I have set out a detailed description of the steps taken in this proceeding earlier in my reasons. Relevant highlights for present purposes include the following:
(a)The respondents filed an unconditional appearance;
(b)The respondents appeared at several hearings, including contested hearings;
(c)The respondents consented to extensive timetabling orders both on 17 May 2019 and on 15 November 2019;
(d)The respondents filed a defence dated 23 August 2019 and an amended defence dated 27 September 2019 which set out their substantive responses to Dialogue’s claims and although pleaded both the original Terms of Use and the revised Terms of Use did not plead or assert the arbitration right. At the case management hearing on 17 May 2019, I even allowed for the filing of a cross-claim and this was provided for in the consent orders that were made;
(e)The respondents sought documents through notices to produce and exchanged categories of discovery;
(f)The respondents made an application for a discharge of Dialogue’s first injunction, and they opposed Dialogue’s second injunction; and
(g)The parties attended a court-ordered mediation on 6 February 2020.
More generally, the respondents participated in this proceeding for 12 months before raising the arbitration question for the first time in their solicitors’ email dated 9 April 2020, serving the stay application.
Moreover, and I will return to this, the respondents’ intentional inconsistent acts caused relevant prejudice to Dialogue.
In summary, and I would say this at the outset, the respondents waived their rights to rely on the arbitration agreement under US law. And the “no waiver” clause in the original Terms of Use does not help them. That is limited to acts of omission, in particular “Instagram’s failure to insist upon or enforce strict performance of any provision of these Terms …”. Instagram, LLC’s conduct that in my view amounts to a waiver under both US law and Australian law goes well beyond pure omissions or merely such a failure. In any event, the contractual terms cannot foreclose broader equitable principles applying to determine the question of waiver as a matter of substance.
Let me now descend into the depths of US law on waiver.
Under § 3 of the FAA, a court is required to stay a proceeding pending arbitration “providing the applicant for the stay is not in default in proceeding with such arbitration”. This is similar to the principle of waiver under the California Arbitration Act § 1281.2(a), which provides that the court is required to stay a proceeding pending arbitration, “unless it determines that … [t]he right to compel arbitration has been waived by the petitioner” (Saint Agnes Medical Center v PacifiCare of California, 31 Cal 4th 1187, 1196 (2003)). So far so good.
Now there is no single test for determining the nature of conduct that will constitute a waiver (Saint Agnes Medical Center at 1196). And the determination of waiver is a question of fact (Saint Agnes Medical Center at 1196; Hoover v American Income Life Insurance Co, 206 Cal App 4th 1193 (2012)). Again, this can all be accepted. But now things get interesting.
There seem to be various tests in dealing with waiver under the FAA. Some are three pronged. Some are six pronged.
The Ninth Circuit, for the most part, seems to apply a three pronged test (Fisher v A.G. Becker Paribas Inc, 791 F 2d 691, 694 (9th Cir, 1986) but cf Cox v Ocean View Hotel Corporation, 533 F 3d 1114 (9th Cir, 2008)) such that what needs to be demonstrated is:
(a)knowledge of an existing right to compel arbitration;
(b)intentional acts inconsistent with that existing right; and
(c)prejudice to the person opposing arbitration from such inconsistent acts.
Another variant of the three pronged test looks at:
(a)the time elapsed from the commencement of litigation to the request for arbitration;
(b)the amount of litigation (substantive motions and discovery); and
(c)prejudice.
The Seventh Circuit does not apply prejudice as a necessary condition (see Cabinetree of Wisconsin Inc v Kraftmaid Cabinetry Inc, 50 F 3d 388, 390 per Chief Judge Posner (7th Cir, 1995)). Rather, the focus has been on choice and manifest intent; the language of presumptive waiver has also been used. But it has been suggested that the Seventh Circuit is an outlier on this aspect. This is surprising to me as the Seventh Circuit’s position in terms of choice and manifest intent resonates harmoniously with the requirements for waiver of a contractual right that I would understand under Australian law. I will return to this later.
The Tenth Circuit seems to apply a six pronged test (Peterson v Shearson/American Express Inc, 849 F 2d 464, 467 to 468 (10th Cir, 1988)). I will come to this in a moment. The significance of this is that, interestingly, perhaps for me only, Californian state courts even when considering the FAA seem to apply the Tenth Circuit approach rather than the Ninth Circuit. And Judge Ware in his expert evidence focused on the six pronged test. What then is it?
When determining waiver under the six pronged test, the following factors are required to be considered:
(a)whether the party’s actions are inconsistent with the right to arbitrate;
(b)whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate;
(c)whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay;
(d)whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings;
(e)whether important intervening steps, such as taking advantage of judicial discovery procedures not available in arbitration, have taken place; and
(f)whether the delay affected, misled or prejudiced the opposing party.
Relevant authority that applies such a test include Sobremonte v Superior Court, 61 Cal App 4th 980, 992 (1998), Saint Agnes Medical Center and Hoover. These six factors are applied by Californian state courts when determining the question of waiver under the FAA (Zamora v Lehman, 186 Cal App 4th 1 (2010); Fleming Distribution Co v Younan, 49 Cal App 5th 73, 81 to 83 (2020)).
Let me say something about these six factors.
As regards the first factor, a party acts inconsistently with exercising the right to arbitrate when it makes an intentional decision not to move to compel arbitration, and actively litigates the merits of a case for a prolonged period of time in order to take advantage of being in court (Newirth v AegisSenior Comty LLC, 931 F 3d 935 (9th Cir, 2019)). Moreover, if the defendant has engaged in acts that are inconsistent with its rights to arbitrate, and the plaintiff incurs costs as a result, then the plaintiff suffers prejudice (Newirth). In my view, as I have said, there is evidence to support an inference that such a decision was made not to move to compel arbitration.
As regards the second factor, no further explanation is required. Of course this is all context dependent, but on any view the second factor is made out in the present case.
As regards the third factor, there comes a point where continuation with litigation of a dispute justifies a finding of waiver (Saint Agnes Medical Center; Fleming Distribution; Hoover). In my view that is clearly the present case.
Now there is no fixed stage of a lawsuit beyond which further litigation waives the right to arbitrate. Rather, the US courts view the litigation as a whole in determining whether the parties’ conduct is inconsistent with a desire to arbitrate. But a demand for arbitration must not be unreasonably delayed. An arbitration must be demanded within a reasonable time, although what constitutes a reasonable time is a question of fact, which depends on the circumstances of the case (Sobremonte; Hoover; Fleming Distribution). A party that seeks arbitration must in a timely fashion seek relief either to compel arbitration or dispose of the lawsuit, before the parties and the court have wasted valuable resources on ordinary litigation.
Diligence or a lack thereof weighs heavily in the decision as to whether there is a waiver (Cabinetree at 391; Kawasaki Heavy Industries Ltd v Bombardier Recreational Products Inc, 660 F 3d 988, 994 (7th Cir, 2011)). A party must do all that it can reasonably be expected to do to determine as early as possible whether to proceed through arbitration or the courts (Cabinetree at 391; Kawasaki at 996). But a party may waive the right by an untimely demand even without any intent to forgo the procedure.
Indeed, some US courts frame the discussion in terms of forfeiture. Forfeiture is the failure to make a timely assertion of a right. A party who fails in a timely fashion to invoke his right to arbitrate is necessarily in fault when he later attempts to proceed with arbitration. A defendant seeking a stay pending arbitration under the FAA who has not invoked the right to arbitrate on the record at the first available opportunity, typically in filing his first responsive pleading or motion to dismiss, has presumptively forfeited that right (Zuckerman Spaeder LLP v Auffenberg, 646 F 3d 919, 922 to 923 (DC Cir, 2011)).
As I have already indicated, and notwithstanding that I had not fixed a trial date in this matter, the third factor heavily favours Dialogue. The respondents delayed for an unreasonably long period before the right to arbitrate was asserted.
As regards the fourth factor, I gave the respondents the opportunity to file a cross-claim, but they did not exercise that option.
As regards the fifth factor, the chronology that I have set out earlier indicates that important intervening steps have been taken in the litigation.
As regards the sixth factor, according to Judge Ware’s evidence, prejudice is an essential element of waiver in Californian courts. But as I have said, there are differences between how federal courts in some other parts of the US would determine the question of waiver.
In the Seventh Circuit, prejudice is not an essential element for a finding of waiver (Cabinetree at 390). Rather, prejudice is a relevant factor to be considered in all the circumstances.
In the DC Circuit, the court takes account of the totality of the circumstances, including any potential prejudice to the non-moving party. Prejudice is a relevant factor in the analysis (Zuckerman Spaeder at 922 to 923).
Now to the extent that prejudice is relevant, the following non-exclusive factors are helpful to the assessment of prejudice (Hoxworth v Blinder, Robinson & Co Inc, 980 F 2d 912, 926 to 927 (3d Cir, 1992)):
(a)the timeliness or lack thereof of the motion to arbitrate;
(b)the extent to which the party seeking arbitration has contested the merits of the opposing party’s claims;
(c)whether the party seeking arbitration informed its adversary of its intent to pursue arbitration prior to seeking to enjoin the court proceedings;
(d)the extent to which a party seeking arbitration engaged in non-merits motion practice;
(e)the requesting party’s acquiescence to the court’s pre-trial orders; and
(f)the extent to which the parties have engaged in discovery.
I should also say here that the sixth factor is not just expressed as prejudice. Importantly it is expressed in terms of whether “the delay ‘affected, misled or prejudiced’ the opposing party”. I will return to the significance of this later, but there is little doubt in my mind that the respondents by their conduct “affected [or] misled” Dialogue.
Before moving on I should note the following. If the Seventh Circuit approach applies, Dialogue succeeds on waiver as no prejudice need be shown. But in my view, in any event Dialogue has shown relevant prejudice or that it has been affected or misled as I will discuss later. Therefore, on either the three pronged test or the six pronged test, Dialogue succeeds in establishing waiver.
Now because Dr Oren Bigos QC for Dialogue relied upon Cabinetree, I should say something further about it.
The respondents say that Dialogue’s reliance on Cabinetree is misplaced. They say that that decision is an outlier, and its facts are distinguishable. Further, it is said that the Seventh Circuit itself later distinguished Cabinetree in three cases based on facts similar to those of the present proceeding. But in one sense that last proposition is incomplete. On my reading none of these cases rejected Cabinetree. Rather they just dealt with different factual scenarios.
Now the respondents say that Cabinetree was distinguished by the Seventh Circuit in Sharif v Wellness International Network Ltd, 376 F 3d 720 (7th Cir, 2004).The Seventh Circuit held that a defendant’s participation in litigation in response to a lawsuit, including filing a motion to dismiss for failure to state a claim, as well as a motion to dismiss for lack of proper venue, did not amount to waiver under Cabinetree. The Seventh Circuit explained (at 726 to 727):
… [I]t is well-established that a party does not waive its right to arbitrate merely by filing a motion to dismiss. … Likewise, a motion to transfer venue does not constitute waiver of the right to arbitrate.
But none of this is a rejection of Cabinetree or its approach as such.
Now the respondents say that like in Sharif, the respondents in the present case did not remove the case to another judicial forum for resolution, no discovery has been given, there is no trial date, and the respondents did not file the stay application when the date of trial on the merits was imminent. Nor have the respondents filed a motion to dismiss the action here. Thus, it is said that Sharif does not assist Dialogue. Now that may be so on the facts. But how it is said that Sharif somehow diminishes Cabinetree in terms of principle is not explained by the respondents.
Further, the respondents say that Cabinetree was distinguished by the Seventh Circuit in Kawasaki. In that case the Court held that a defendant waiting two years before requesting arbitration was not sufficient to waive its right to arbitrate because, inter-alia, the defendant merely responded to the plaintiff’s litigation actions, “which cannot be characterized as a choice for judicial resolution of the dispute”.
The Seventh Circuit explained (at 996 to 998):
… As Kawasaki rightly points out, we stated in Cabinetree that a party must do all that it can reasonably be expected to do to determine as early as possible whether to proceed through arbitration or the courts. But in Cabinetree, the defendant “dropped a bombshell” by invoking its right to arbitration after significant delay, Cabinetree, 50 F.3d at 389, for which the defendant had no explanation. Similarly, we found in St. Mary’s that the defendant’s ten-month delay between the plaintiff's filing of a claim and the defendant’s motion to stay for arbitration was inconsistent with the intent to arbitrate, especially since the defendant “never even mention[ed] arbitration until after it lost its motion [to dismiss or for summary judgment].”
…
We stated in Cabinetree, “A defendant who wants arbitration is often content with a stay, since that will stymie the plaintiff’s effort to obtain relief unless he agrees to arbitrate”. 50 F.3d at 389. Similarly, an appropriate motion to dismiss (or an argument against jurisdiction, as the case may be) stymies a plaintiff’s attempt at judicial relief and is consistent with the intent to arbitrate, especially when that motion includes an argument that the case belongs in arbitration. The waiver determination is not based on whether a party has jumped through the proper technical hoops, but rather is a totality-of-the-circumstances analysis that aims to ascertain whether a party intended to abandon the right to arbitrate by submitting a dispute to the courts, or at least acted in such a way.
…
Finally, Kawasaki correctly asserts that in this Circuit, “waiver may be found absent a showing of prejudice”, though prejudice is a relevant consideration. St. Mary’s, 969 F.2d at 590 , quoting Nat’l Found. for Cancer Research v. A.G. Edwards & Sons, 821 F.2d 772 , 777 (D.C.Cir.1987). Prejudice is only considered, however, when it results from “the conduct allegedly constituting waiver”. ... Here, BRP’s actions were wholly consistent with the intent to arbitrate. There was therefore no conduct constituting waiver which could have prejudiced Kawasaki, so prejudice is a non-factor in this case.
Kawakasi does not reject the approach in Cabinetree. Rather it applies it, but of course to a different set of facts. Indeed it expressly affirms that waiver can be found absent prejudice.
Further, the respondents say that in Cooper v Asset Acceptance LLC, 532 F Appx 639 (7th Cir, 2013), the Seventh Circuit again rejected a plaintiff’s reliance on Cabinetree, which the respondents say was based on facts similar to those here. The Court explained (at 641 and 642):
Cooper’s reliance on Cabinetree is likewise unavailing. In Cabinetree, the defendant removed the case to federal court and participated in extensive discovery. Considering both the removal and the extensive participation in discovery, we held that the defendant chose to proceed in litigation, which triggered a presumption of waiver. The defendant could not overcome that presumption, and we ruled that it had waived its right to arbitrate. While Asset did remove the case to federal court, its participation in discovery was not as extensive as that of the defendant in Cabinetree. Furthermore, Asset moved to stay discovery while its motion to dismiss was pending, which evinced its desire not to participate in litigation. It only did so because the district court denied its motion to stay.
Moreover, in Cabinetree the defendant waited to file its motion to compel arbitration until six months before the trial date, effectively “dropp[ing] a bombshell” into the proceedings. Here, Asset filed its motion to compel arbitration fourteen months prior to the trial date, but immediately after the district court declined to grant its motion to dismiss. As another district court cogently observed, this “modest delay [in filing a motion to compel arbitration] certainly is nothing extraordinary amid the delay endemic to the world of the law and does not shock the Court’s conscience”. … Here, there was no “bombshell” dropped into the litigation, and any delay in Asset’s filing of its motion to compel arbitration resulted from waiting for the district court’s ruling on its motion to dismiss. Finally, any presumption of waiver due to Asset’s removal of the case to federal court is rebuttable where a party’s activities did not “signify an intention to proceed in a court to the exclusion of arbitration”. Cabinetree, 50 F.3d. at 390. We see no clear error in the district court’s determination that Asset did not commit to a non-arbitral resolution of its dispute with Cooper, particularly in light of the fact that Asset attempted to stay discovery and only participated in discovery because the district court declined to do so.
But again, none of this undermined the approach in Cabinetree. All that occurred, unremarkably, was that different facts resulted in different outcomes.
Let me deal with some other points made by the respondents.
First, the respondents say that Dialogue has incorrectly relied on Californian cases to argue that a single, objective time limit exists for invoking the right to arbitrate. But I did not understand Dialogue so to argue. And if it did, it is incorrect. The question is what is a reasonable time in the context and circumstances presented (see Hoover at 1203 to 1205).
Second, the respondents say that Dialogue’s reliance on Fleming Distribution is misplaced. And unlike Fleming Distribution, the respondents say that they reserved the right to arbitrate. But in my view this is incorrect as I have previously discussed. But I do accept that Fleming Distribution is distinguishable from the facts before me.
Let me at this point then draw out some broader themes.
If I was sitting in California as an arbitrator applying US federal law, I see no reason not to apply what was said in the Seventh Circuit in Cabinetree, namely, that although prejudice was a relevant factor, it was not a necessary condition. Moreover, I do not see Cabinetree as an outlier in terms of the Seventh Circuit; none of Kawasaki, Sharif and Cooper disapprove of Cabinetree. Is Cabinetree an outlier as between other Circuits? It would seem that it may be. The Ninth Circuit in Newirth discussed prejudice, and in Richards seemed to indicate that it was a necessary condition. Clearly, there are different Circuit approaches. Let me then move to California where Cabinetree seems to be perceived by Californian state courts to be a minority view.
What does the appellate authority in the Californian state courts say?
Saint Agnes Medical Centre would suggest a number of propositions.
First, there is little difference between Californian law and US federal law.
Second, “no single test delineates the nature of the conduct that will constitute a waiver.”
Third, there seems to be a spectrum of conduct that could constitute waiver “ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration to instances in which the petitioning party has unreasonably delayed in undertaking the procedure.”
Now just stopping here, in my view, Instagram, LLC in the present context would fit within either possibility.
Fourth, Saint Agnes Medical Centre referred to the six factors set out in Sobremonte, the sixth factor being “whether the delay ‘affected, misled, or prejudiced’ the opposing party.” But I note that in Fleming Distribution, it was emphasised that there was no single test and that when applying the Sobremonte and Saint Agnes Medical Centre factors, no one factor was predominant. Indeed, unreasonable delay may be considered a significant and determinative issue.
But if prejudice is a necessary condition, what needs to be shown? It seems to me that the concept of prejudice in the Californian state court cases has some degree of flexibility.
It would seem that prejudice may be inferred from undue or unreasonable delay in taking the arbitration point such that a party’s ability to use the otherwise efficiencies of arbitration has been significantly impaired. So too in the proceeding before me.
Further, and related thereto, prejudice may flow from wasted valuable resources on ordinary litigation. So too is that established in the proceeding before me.
Further, prejudice may flow as described by Sobremonte. It is worth setting out some of the passages (at 994 to 997):
In our case, Sobremonte and Esperidion were prejudiced by the Bank’s delay and corresponding activities. As a result, they spent 10 months preparing their case for a full trial at a considerable expenditure of time and money. To prove their claim, Sobremonte and Esperidion engaged in judicial discovery procedures that were more expansive than those available through arbitration. They participated in hearings, status conferences and opposed the Bank’s various motions and ex parte applications.
…
Sobremonte and Esperidion have been further prejudiced by their now inability to take advantage of the benefits of arbitration. Arbitration is an expedient, efficient and cost-effective method to resolve disputes. If we consider the amount of time and money they have already spent in the judicial system, any benefits they may have achieved from arbitration have been lost.
…
A consideration of all factors leads to the conclusion that the Bank waived its right to compel arbitration. We acknowledge that arbitration is the preferred method of resolving disputes. However, the benefits it can provide, to both the parties and an already overburdened judicial system, become illusory when there is a failure to timely and affirmatively implement the procedure. Mere announcement of the right to compel arbitration is not enough. To properly invoke the right to arbitrate, a party must (1) timely raise the defense and take affirmative steps to implement the process, and (2) participate in conduct consistent with the intent to arbitrate the dispute. Both of these actions must be taken to secure for the participants the benefits of arbitration.
(Citations omitted)
Let me make some other points on the sixth factor referred to in Saint Agnes Medical Centre and Sobremonte.
As I have said, the sixth factor does not just use the language of prejudice. It is more broadly expressed. Either the sixth factor goes beyond prejudice or uses an expanded notion of it. The sixth factor is expressed in terms of “whether the delay ‘affected, misled or prejudiced’ the opposing party”.
And as to prejudice, there seems to be a distinction between substantive prejudice and prejudice in terms of expense and delay. An example of substantive prejudice is where the moving party has lost an application on the merits and then seeks to relitigate by invoking arbitration. That is not my case. The other type of prejudice is where a party has postponed for too long invoking its contractual right to arbitration and accordingly causes unnecessary delay or expense to the other party. That is my case. And as to this other type of prejudice, there are no bright lines concerning the period of delay or the expense involved. This is all context dependent.
Now it has been said that investment in time and money in litigation is not sufficient to produce prejudice. Expense wasted by delay in seeking to arbitrate is not sufficient. In other words “self inflicted” expense is not evidence of prejudice. So, expense incurred as a result of a deliberate choice of an improper forum is not prejudice. But here, some claims had to be litigated by Dialogue in Australia. Further, adopting the respondents’ position entails multiple proceedings in Australia and California. In other words, I am not dealing with a case where all claims of Dialogue could have been arbitrated. So in my view I am not dealing with a plain vanilla case of the deliberate choice by Dialogue of an improper forum.
In my view there is or will be prejudice to Dialogue. The respondents’ deliberate and inconsistent acts in the proceeding before me will have caused unnecessary expense, delay and inefficiency to Dialogue if I now accede to the respondents’ application. Further, the respondents by their conduct including unreasonable delay have misled Dialogue into thinking that the proceeding was the appropriate forum for the parties to resolve their disputes, not Californian arbitration and then only for part of the claims.
Finally, I should say something about public policy in light of the fact that at best for the respondents it could be said that they sat on their hands for 12 months. Their belated assertion of their arbitration right is wholly inconsistent with the objects of the IAA and the public policy objectives behind promoting international commercial arbitration. Indeed to my way of thinking, to now force Dialogue to arbitrate would be contrary to public policy. Such a course would not be expedient, efficient or cost-effective for the resolution of the disputes between the parties.
In summary, whatever US test is applied, in my view Instagram, LLC has waived its arbitration right. Therefore, s 7(5) of the IAA applies and no mandatory stay under s 7(2) is triggered.
But if I am wrong on choice of law and Australian law applies to the question of waiver, then there has been a waiver under Australian law.
(c) Application of Australian law to the question of waiver
Under Australian law it would seem that there are two different standards of waiver, namely, waiver in the stronger sense and waiver in a weaker sense (see ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896 at [53] to [63] per Austin J, referred to in BHPB Freight Pty Ltd v Cosco Oceania Chartering Pty Ltd (2008) 168 FCR 169 at [52] and [53] per Finkelstein J). But only waiver in the stronger sense is embraced by s 7(5).
Waiver in the stronger sense is an abandonment of a right whether expressly or implied from intentional acts with knowledge. In my opinion that has been established on the facts before me.
By contrast, waiver in the weaker sense applies when the grant of a stay is discretionary. Such a weaker sense embraces matters going to the exercise of the court’s discretion, rather than a firm substantive doctrine. As Austin J noted in Tridon, that form of waiver can be relevant in connection with applications for leave to amend or to strike out a pleading. And it can be relevant to an application for a stay, but only when the grant of the stay is a discretionary matter.
But under the IAA, the grant of a stay under s 7(2) is mandatory. Accordingly, matters going to the exercise of the Court’s discretion including waiver in the weaker sense are irrelevant to ss 7(2) and (5); to the extent that Cosco suggests otherwise, I doubt it. With respect to a stay application under s 7(2) either there is waiver in the stronger sense or there is no waiver.
Now the respondents say that under this standard of waiver, there has been no waiver. They say that there has been no election between inconsistent rights because the respondents have not made any unequivocal or final choice between alternative procedures. But I am dealing with waiver, not election as such. Waiver can be an intentional act with knowledge not to rely upon but to abandon a contractual right. It is not necessarily predicated on a choice between inconsistent rights. But in any event, as I have said, the respondents have acted inconsistently concerning the right to arbitrate by its conduct in the proceeding.
Now the respondents say that they expressly reserved their rights as to jurisdiction, venue and service shortly after commencement of this proceeding. But I have already set out my views concerning that so called reservation; it did not reserve the right to arbitrate.
Further, the respondents say that under the original Terms of Use, neither party was bound by a time limitation for invoking the arbitration agreement. Further, the respondents also took refuge in the argument that under the heading “Governing Law & Venue” it was said that “Instagram’s failure to insist upon or enforce strict performance of any provision of these Terms will not be construed as a waiver of any provision or right. No waiver of any of these Terms will be deemed a further or continuing waiver of such term or condition or any other term or condition”. I have already disposed of that argument.
In my view, under Australian law, the respondents waived their rights to rely on the arbitration agreement. I am referring here to waiver in the stronger form. That waiver leads to the conclusion that the arbitration agreement is inoperative or incapable of being performed under s 7(5), and the stay should be refused.
Finally, for completeness, I should again make the point that my finding on waiver under s 7(5), whether applying US law or Australian law, entails that there is no mandatory stay under s 7(2). And in the way the parties argued the case, no discretionary stay question now arises. The respondents only ever argued for a discretionary stay of the competition claims if I had accepted their argument for a mandatory stay under s 7(2) of the other claims. But I have rejected that premise. But in any event, if there had been any residual argument for a discretionary stay, I would have rejected such an argument by reason of waiver in the weaker sense; all of the matters put by Dialogue which I have accepted within a different conceptual framework would provide substantial reasons to reject such a discretionary stay.
CONCLUSION
For all the above reasons, the respondents’ stay application should be dismissed.
Further, Dialogue’s cross-application should also be dismissed.
As to the question of costs, I would normally award costs to Dialogue. But it failed on most of its arguments including its cross-application, albeit that that application was reactive. In my view the appropriate order is that I should treat the parties’ costs on both applications as being their costs in the cause. I will make orders accordingly.
I certify that the preceding six hundred and three (603) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach. Associate:
Dated: 22 December 2020
SCHEDULE OF PARTIES
VID 369 of 2019 Respondents
Fourth Respondent:
INSTAGRAM, LLC
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