In a Fraudulent Advertising Case Against a Retailer, When Can the Retailer Compel Arbitration?

In Cavlovic v. J.C. Penney, No. 17-3174, (10^th Cir. March 8, 2018), Ann Cavlovic (“Cavlovic”) filed suit against the J.C. Penney Corporation, Inc., (“J.C. Penney”) alleging J.C. Penney used fraudulent advertising practices.

On December 16, 2016, Cavlovic filed a class action complaint in Kansas state court, alleging J.C. Penney used a “False Former Price Advertising Scheme.”, claiming J.C. Penney would mark up its private-branded clothing and accessories by a significant margin and then immediately offer those products at what it represented to be steep discounts. Cavlovic sought to represent a group of more than 100 people who, bought, from J.C. Penney, in Kansas, one or more private and/or exclusive branded items at a discount of at least 30% off of the stated ‘original’ or ‘regular’ price, and who have not received a refund or credit for their purchases.

Cavlovic bought earrings with a credit card that had J.C. Penney’s logo on it. GE Money Bank first issued the card to Cavlovic in 2007, with Cavlovic signing a contract to accept the card’s terms, and the relationship continued in subsequent years between Cavlovic and the successors to GE Money Bank. In a separate contract—the 2014 Rewards Program agreement—J.C. Penney promised Cavlovic it would issue J.C. Penney Rewards Points for purchases at J.C. Penney using the J.C. Penney-branded card.

J.C. Penney removed the case to the United States District Court for the District of Kansas. It then moved to dismiss the case. A month later, though, J.C. Penney moved to stay the proceedings and compel arbitration based on two documents: (1) the 2008 credit card agreement between Cavlovic and GE Money Bank for the J.C. Penney-branded credit card; and (2) the 2014 Rewards Program agreement between Cavlovic and J.C. Penney.

After Cavlovic’s answer, J.C. Penney renewed its arguments that any contract other than the 2008 credit card agreement was irrelevant. And as to the J.C. Penney Rewards Program, Cavlovic argued her complaint’s allegations about fraudulent advertising fall outside the scope of the arbitration clause in the 2014 Rewards Program agreement.

The magistrate judge then ruled on the motion to compel arbitration. She first concluded the 2012 credit card agreement controls the litigation, and that it is identical in all respects relevant” to the 2016 credit card agreement. The magistrate judge concluded the 2012 credit card agreement was narrower in scope than the 2008 credit card agreement,  the allegations in Cavlovic’s complaint fell outside the scope of the 2012 credit card agreement, and that the 2012 credit card agreement did not provide J.C. Penney with the ability to enforce its arbitration provision. Further, the magistrate judge held the allegations in Cavlovic’s complaint were outside the scope of the 2014 Rewards Program agreement because Cavlovic’s claims are based on J.C. Penney’s allegedly fraudulent pricing—not on breach of terms of the rewards program from either party.

In this appeal, the Court will decide whether the district court correctly concluded that J.C. Penney could not compel arbitration under either the 2012 credit card agreement or the 2014 Rewards Program agreement.

First, for each contract, was there an agreement, and did the agreement provide J.C. Penney—with the right to compel arbitration. Second, if the parties had an agreement that provided the moving party with the right to compel arbitration, then the facts at issue must be analyzed to determine whether they are within the scope of the arbitration agreement. The law says a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. Utah law is the 2012 credit card agreement’s choice of law clause. Upon analyzing the contract, J.C. Penney had no such right of enforcement under the 2012 credit card agreement. It is undisputed that J.C. Penney was not a party to that agreement. The contract was only between Cavlovic and GE Capital Retail Bank. A plain reading of this provision leads us to conclude that arbitration is required if either “you” (Cavlovic) or “we” (GE Capital Retail Bank) demand arbitration. Here, neither Cavlovic nor GE Capital Retail Bank— nor its successor, Synchrony Bank—demanded arbitration. Only J.C. Penney demanded arbitration. And the contract, on its face, does not provide for such a third-party demand.

Unlike the credit card agreement, there is no dispute that J.C. Penney was a party to the 2014 Rewards Program agreement and has the power to enforce its provisions. There is, however, a dispute regarding venue, and whether Cavlovic’s allegations are within the scope of the 2014 Rewards Program agreement’s arbitration clause. J.C. Penney waived any argument regarding venue when it removed the case to federal court, and Cavlovic’s allegations are outside the scope of the 2014 Rewards Program agreement.

Did the district court correctly determined that Cavlovic’s complaint fell outside the scope of the 2014 Rewards Program agreement? The 2014 Rewards Program agreement covers all claims arising from or relating to the Rewards Program.

J.C. Penney says because the relevant contractual language is broad, any allegation by Cavlovic against J.C. Penney that even tangentially involves the 2014 Rewards Program agreement must be subject to arbitration. But, because the 2014 Rewards Program agreement had a Texas choice of law clause, Texas law must be followed. And under Texas law, the inquiry continues beyond an initial determination that the arbitration provision is broad.

In plain language, Cavlovic and J.C. Penney agreed to arbitrate disputes that arose from or related to the Rewards Program. For instance, the parties likely agreed to arbitrate a disagreement about whether Cavlovic was receiving an adequate number of Rewards Points, or whether J.C. Penney was giving Cavlovic the proper amount of store credit for her Rewards Points.

Yet, a plain reading of the arbitration provision does not support the conclusion that Cavlovic and J.C. Penney also agreed to arbitrate disputes about purchases Cavlovic made at J.C. Penney on which she happened to earn J.C. Penney Rewards Points. The complaint’s allegations of fraudulent advertising do not arise from the Rewards Program or the amount of Rewards Points Cavlovic received for purchases. The complaint’s allegations arise from J.C. Penney’s alleged practice of falsely inflating their original prices, only to subsequently mark the prices back down to leave an impression of a deep discount.

Therefore, the mere existence of the Rewards Program agreement is not itself sufficient to conclude that Cavlovic’s allegations of deceptive advertising arise from or relate to that contract. Therefore, the district court’s rulings are affirmed.