October 30, 2015

Privacy Claim Doesn’t Preclude Invocation of Arbitration Clause in Unrelated Litigation

Digital Technology & E-Commerce Blog
Richard Raysman

The Telephone Consumer Protection Act (“TCPA”) was primarily implemented to prevent consumers from receiving what had devolved into a veritable onslaught of calls from telemarketers and debt collectors. Passed in 1991, the TCPA limits the use of many tools of those who vex consumers without their consent with their frequent and often harassing calls, including automatic dialing systems, artificial or prerecorded voice messages, SMS text messages and faxes. It also prohibits the contacting of consumers via residential lines before 8 am or after 9 pm. Largely deemed a success to date, claims rooted in the TCPA has produced a fine in upwards of $75 million against a consortium of companies using an automated dialer to reach customers’ cellphones without consent.

That large fine was premised on the sets of circumstances that often underlie TCPA claims. However, in an October federal court case in Illinois, a party counterclaiming against a TCPA violation with a breach of a software license used a novel trick in that it attempted to prove that the instigation of TCPA-related litigation thereafter waived any rights to arbitration that the instigating party may be afforded under a separate software license agreement. This unique case is the subject of this post. See Physicians Healthsource, Inc. v. Allscripts Health Solutions, Inc., --- F. Supp. 3d ----, 2015 WL 6318272 (N.D. Ill. Oct. 21, 2015).

Facts and Procedural Background

In May 2012, Plaintiff Physicians Healthsource, Inc. (“Physicians”) sued Defendant Allscripts Health Solutions, Inc. (“Allscripts”) for 36 alleged violations of the TCPA.

Such TCPA violations by Allscripts arose from a purported sending of 36 unsolicited fax messages by Physicians between February 11, 2008 and April 26, 2008 which offered “Free beach towels or copy paper or cookie jars” provided the recipient purchased sufficient office supplies. Three years into this litigation, on June 1, 2015, Allscripts filed a counterclaim alleging that Physicians, as licensee, had violated an existing software license (the “License”) between the two parties. The License covered software “designed to be used in connection with defendants’ medical billing and collections.”

Allscripts alleged that Physicians violated the License by permitting its former office manager to use the software at home while doing subcontractor work for Physicians in 2008 and 2009. The court does not discuss why such actions are alleged to be in violation of the License, nor does it dispose of such a question, and accordingly it will go unremarked in this blog.

Physicians moved to either dismiss the License counterclaim for improper venue, or alternatively, to stay it pending arbitration pursuant to an arbitration clause in the License. Allscripts responded that, while its counterclaim was within the purview of the arbitration clause in the License, Physicians waived its right to compel arbitration pursuant to this clause by filing the TCPA claim in federal court in 2012.

Legal Analysis and Conclusions

As Allscripts alleged that the filing of the TCPA action in federal court constituted a waiver of the arbitration provision in the License, the court first observed that “the question here, as always, is, disputes about what and, in this case, whether the plaintiff has waived its right to arbitrate.” Under Seventh Circuit precedent, the right to arbitrate can be expressly or impliedly waived. See Kawasaki Heavy Indus, Ltd. v. Bombadier Recreational Prods., Inc., 660 F.3d 988, 994 (7th Cir. 2011). As Physicians had not expressly waived the right to arbitrate as afforded by the License, the court solely analyzed whether its 2012 TCPA filing was tantamount to an inferred waiver of the arbitration provision in the License. Further to the point, the question the court had to answer is whether “what the plaintiff did in this case” is “inconsistent with the right to invoke the arbitration provision” in the License.

The court first concluded that “all plaintiff has done is file its TCPA case and participate in the ensuing litigation.” To that end, once Physicians was informed of the counterclaim referencing the License, it “was not slow” in asserting the arbitration provision in the License. This reality militates against a finding that Physicians had waived the arbitration provision by filing the TCPA litigation, particularly because, at the crux of the matter, the court concluded that filing the TCPA claim could not have been sufficiently related to any litigation regarding the License so as to put Physicians on notice that it had waived any arbitration rights pursuant to the License.

Notably, the court indicated that Allscripts’ conduct since the inception of the litigation indicated that they also did not believe that the TCPA filing at all triggered a waiver of any arbitration provisions in the License. In its initial answer, as well as follow-up rebuttals, Allscripts never cited arbitration as a defense, which the court found as odd, insofar as it believed that “three years is certainly a long time to sleep on one’s rights, especially if, as one would gather from defendants’ brief, it was so “clear” that the TCPA claim was subject to the arbitration provision of [the License] … it certainly wasn’t clear to [Allscripts].” (emphasis in original)

Further, since the TCPA authorizes actual damages of $500 per fax, as well as treble damages if the violations are willful, Allscripts could be facing $18,000 in damages, as well as treble damages and an even further financial loss in the instance of class action lawsuits. Ergo, it stands to reason that Allscripts would proffer every viable defense possible to the TCPA allegations from the outset, including an arbitration defense. That it did not until three years after the TCPA claims were first filed is evidence to the court that Allscripts did not genuinely believe the arbitration provision in the License to be a viable defense to the TCPA litigation.

Ultimately, the Northern District concluded that “the totality of the circumstances suggests that [Physicians] did not think when it filed its lawsuit that it had anything to do with the [License] which was not mentioned until [Allscripts] filed its motion to amend their answer and counterclaims in May 2015.” Therefore, the court granted Physicians’ motion to dismiss for improper venue.

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