FEDERAL COURT OF AUSTRALIA

Instagram Inc v Dialogue Consulting Pty Ltd [2022] FCAFC 7

Appeal from:Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846
  
File number:VID 42 of 2021
  
Judgment of:JAGOT, LEE AND STEWART JJ
  
Date of judgment:4 February 2022
  
Catchwords:ARBITRATION – international commercial arbitration – appeal from refusal to stay proceeding in favour of arbitration under s 7 of the International Arbitration Act 1974 – where respondents filed stay application one year after proceeding was instituted – whether right to arbitration was waived – whether the primary judge’s discretion miscarried in determining the question of waiver rather than referring it to an arbitrator – whether the applicant suffered prejudice by reason of the respondents’ conduct 
  
Legislation:International Arbitration Act 1974 (Cth) s 7Federal Court Rules 2011 (Cth) rr 16.45, 20.31
  
Cases cited:Cabinetree of Wisconsin Inc v Kraftmaid Cabinetry Inc, 50 F 3d 388 (7th Cir, 1995)Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846Fisher v AG Becker Paribas Inc, 791 F 2d 691 (9th Cir, 1986)Hancock Prospecting Pty Ltd v Rinehart [2017] FCAFC 170; 257 FCR 442House v The King [1936] HCA 40; 55 CLR 499Newirth v Aegis Senior Communities, LLC, 931 F 3d 935 (9th Cir, 2019)Saint Agnes Medical Center v PacifiCare of California, 31 Cal 4th 1187 (SC Cal, 2003)
  
Division:General Division
  
Registry:Victoria
  
National Practice Area:Commercial and Corporations
  
Sub-area:International Commercial Arbitration
  
Number of paragraphs:107
  
Date of hearing:17 November 2021
  
Counsel for the Appellants / Cross-Respondents:Mr A Bannon SC, Dr R Garnett, Mr C Bannan and Ms N Oreb
  
Solicitor for the Appellants / Cross-Respondents:Corrs Chambers Westgarth
  
Counsel for the Respondent / Cross-Appellant:Dr O Bigos QC and Mr Z de Kievit
  
Solicitor for the Respondent / Cross-Appellant:Phi Finney McDonald

ORDERS

 VID 42 of 2021
 
BETWEEN:INSTAGRAM INCFirst AppellantMETA PLATFORMS INCSecond AppellantFACEBOOK IRELAND LTD (and another named in the Schedule)Third Appellant
AND:DIALOGUE CONSULTING PTY LTD (ACN 153 007 259)Respondent
  
AND BETWEEN:DIALOGUE CONSULTING PTY LTD (ACN 153 007 259)Cross-Appellant
AND:INSTAGRAM INC (and others named in the Schedule)First Cross-Respondent
   
ORDER MADE BY:JAGOT, LEE AND STEWART JJ
DATE OF ORDER:4 FEBRUARY 2022

THE COURT ORDERS THAT:

  1. Leave to appeal be granted.
  2. The appeal be dismissed.
  3. The cross-appeal be dismissed.
  4. The appellants pay the respondent’s costs of the appeal and cross-appeal.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

JAGOT J:

  1. I agree with the reasons of Stewart J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Jagot.

Associate:

Dated:       4 February 2022

REASONS FOR JUDGMENT

LEE J:

  1. I agree with the reasons of Stewart J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Lee.

Associate:

Dated:       4 February 2022

REASONS FOR JUDGMENT

STEWART J:

Introduction

  1. This is an application for leave to appeal and, if leave is granted, an appeal from the decision in Dialogue Consulting Pty Ltd v Instagram, Inc[2020] FCA 1846. The primary judge dismissed an application by the appellants, the Meta parties, to stay the principal proceeding under s 7(2) of the International Arbitration Act 1974 (Cth) (IAA) in favour of arbitration pursuant to an arbitration agreement. The primary judge also dismissed a cross-application by the respondent on the appeal, Dialogue Consulting Pty Ltd, that sought, inter alia, an order declaring the relevant arbitration agreement to be void for unfairness under s 24 of the Australian Consumer Law (ACL) and an injunction preventing reliance on the agreement, which reliance was said to be unconscionable contrary to s 21 of the ACL.
  2. The primary judge held that the Meta parties waived their right to arbitrate which, under s 7(5)of the IAA, had the consequence that a stay was not required. The Meta parties contend that the primary judge erred in determining the waiver point himself rather than referring that question to arbitration under the Kompetenz–Kompetenz (or compétence–compétence) principle. The Meta parties further contend that the primary judge erred in determining that they waived their right to arbitrate, an issue which the primary judge held was to be determined by reference to the federal law of the United States of America.
  3. By draft notice of contention, Dialogue contends that Art 8(1) of the UNCITRAL Model Law on International Commercial Arbitrationapplies and that the Meta parties’ application for a stay was out of time under that provision as it was filed later than when the Meta parties submitted their “first statement on the substance of the dispute” (i.e., their defence). It also contends that the issue of waiver is to be determined by reference to Australian law. There is also a proposed cross-appeal by Dialogue by which it says that the primary judge erred in finding the arbitration agreement not to be an unfair term.
  4. The fact that the Meta parties assert a substantive right rather than merely a point of practice or procedure, the substantial injustice that would be done if the decision at first instance was wrong but not corrected on appeal, as well as the complexity of the matter, warrant that leave to appeal be granted. However, for the reasons which follow, the appeal should be dismissed. Given that conclusion, the notice of contention and cross-appeal do not arise for consideration.

Background

  1. The following facts are relevant to the present appeal and cross-appeal. A comprehensive background is set out in the primary judgment. It need not be repeated here.
  2. The second appellant, Meta PlatformsInc (which was until 28 October 2021 known as Facebook Inc), provides a number of social media services (or platforms) including, relevantly, Facebook and Instagram. Meta Platforms has provided both services since July 2018. Prior to that time, Facebook was provided by the third appellant, Facebook Ireland Ltd, and Instagram was provided by the fourth appellant, Instagram LLC, although Facebook Inc (as it was then known) was the holding company of both. In these reasons, a reference to Facebook or Instagram as an entity (as opposed to a social media service or platform) is a reference to the second, third or fourth appellant at the relevant time, there being no issue that turns upon the precise identification of the relevant corporate entity.
  3. Dialogue is a company incorporated in Australia with its registered office in Melbourne. Its sole director is Hugh Stephens. Since 2013, Dialogue has provided a software product first called Schedugram and later Sked Social. The product is designed to manage the publishing of Dialogue’s clients’ content initially only on Instagram but later also on other social media platforms including Facebook. Dialogue’s clients, being Instagram users themselves, engage Dialogue on a subscription basis to interact with Instagram on their behalf. Clients select content that they wish to publish at a particular time and with a particular caption and Dialogue publishes that content through its product by an automated process. In order to do this, clients provide Dialogue with their Instagram login details on a confidential basis.
  4. In order to access or use Instagram, or register to use it, users are required at the point of registration to agree to Terms of Use. Instagram published Terms of Use on 19 January 2013 (2013 Terms), which were effective from that date until between 19 April 2018 and 14 July 2018 depending on when users consented to new terms that were published on 19 April 2018 (2018 Terms).
  5. The 2013 Terms contained (but the 2018 Terms do not) an arbitration clause, which provided as follows:

Arbitration

Except if you opt-out or for disputes relating to: (1) your or Instagram’s intellectual property (such as trademarks, trade dress, domain names, trade secrets, copyrights and patents); (2) violations of the API Terms; or (3) violations of provisions 13 or 15 of the Basic Terms, above (“Excluded Disputes”), you agree that all disputes between you and Instagram (whether or not such dispute involves a third party) with regard to your relationship with Instagram, including without limitation disputes related to these Terms of Use, your use of the Service, and/or rights of privacy and/or publicity, will be resolved by binding, individual arbitration under the American Arbitration Association’s rules for arbitration of consumer-related disputes and you and Instagram hereby expressly waive trial by jury. As an alternative, you may bring your claim in your local “small claims” court, if permitted by that small claims court’s rules. …

You may opt out of this agreement to arbitrate. If you do so, neither you nor Instagram can require the other to participate in an arbitration proceeding. To opt out, you must notify Instagram in writing within 30 days of the date that you first became the subject to this arbitration provision. You must use this address to opt out: …

Instagram, LLC ATTN: Arbitration Opt-out 1601 Willow Rd. Menlo Park, CA 94025

(Emphasis added.)

  1. The 2013 Terms also included a choice of law and jurisdiction clause:

Governing Law & Venue

These Terms of Use are governed by and construed in accordance with the laws of the State of California, without giving effect to any principles of conflicts of laws … For any action at law or in equity relating to the arbitration provision of these Terms of Use, the Excluded Disputes or if you opt out of the agreement to arbitrate, you agree to resolve any dispute you have with Instagram exclusively in a state or federal court located in Santa Clara, California, and to submit to the personal jurisdiction of the courts located in Santa Clara County for the purpose of litigating all such disputes.

(Emphasis added.)

  1. In January 2014, during the currency of the 2013 Terms, Dialogue created an Instagram account and thereafter also accessed and used Instagram on behalf of its clients. There is no dispute that Dialogue was thereby bound by the 2013 Terms in respect of its use of Instagram during the currency of those terms.
  2. In January 2014, Instagram first raised with Dialogue that by collecting users’ (i.e., its clients’) login information Dialogue was in breach of the 2013 Terms. Dialogue denied any wrongdoing, and lengthy correspondence ensued. Ultimately, on 12 February 2019, Meta Platforms took what the primary judge described as self-help action and terminated Dialogue’s access to Instagram, banned the domain names used for Sked Social from Facebook and Instagram, and deactivated Mr Stephens’ personal Facebook account. These actions were taken without any prior warning and form the basis of Dialogue’s complaints in the principal proceeding.
  3. On 11 April 2019, Dialogue commenced the principal proceeding seeking final injunctive and declaratory relief, alternatively damages. In support of that relief, it pleads in its further amended statement of claim various breaches of the ACL as well as contraventions of ss 45(arrangements substantially lessening competition) and 47 (exclusive dealing) of the Competition and Consumer Act 2010 (Cth) (Competition Claims). It also filed an interlocutory application seeking interim and interlocutory injunctions restraining the Meta parties from terminating its access to Facebook and Instagram.

History of the proceeding below

  1. Because of its importance to the issue of waiver as decided against the Meta parties, it is necessary to set out a brief chronology of the events which occurred in the proceeding before the primary judge.
  2. On 15 April 2019, the primary judge made ex parte orders granting Dialogue an interim injunction and leave to serve the Meta parties abroad under the Hague Convention.
  3. On 16 May 2019, the Meta parties instructed Gadens solicitors and a notice of address for service was filed on that day.
  4. On 17 May 2019, the Meta parties made an unconditional appearance at a case management hearing and consented to orders continuing the injunction previously made and providing for a timetable for pleadings and discovery, which timetable was extended by consent from time to time.
  5. There then followed a period in which both sides took steps to further the progress of the principal proceeding, including, relevantly:

(1)          the filing by Dialogue of a statement of claim on 28 June 2019 and an amended statement of claim on 6 September 2019;

(2)          the filing by the Meta parties of a defence and an amended defence on 23 August 2019 and 30 September 2019 respectively, both of which were silent on the question of any challenge to jurisdiction or reliance on any arbitration agreement;

(3)          the production of documents for inspection pursuant to notices to produce served by the Meta parties on 30 August 2019 and 12 November 2019;

(4)          the provision by Dialogue of further and better particulars on 17 October 2019 and 13 December 2019 in response to requests by the Meta parties on 30 August 2019 and 22 November 2019; and

(5)          the exchange of correspondence over a period of time in which the parties sought to reach agreement on categories of documents for discovery as required by orders of the Court on 17 May 2019 (which orders were subsequently varied on a number of occasions).

I will return to these matters later in these reasons.

  1. On 18 October 2019, Gadens wrote to Dialogue’s solicitors, Phi Finney McDonald (PFM), alleging further breaches of various terms (to which it says Dialogue agreed) by:

(a)          using automated means to collect user information, specifically Instagram posts and associated media, from Instagram without Facebook’s permission; and

(b)          storing them in a manner which fails to properly secure and protect the user information.

  • Gadens and PFM engaged in further correspondence concerning these allegations which culminated in the filing on 14 November 2019 by Gadens on behalf of the Meta parties of an interlocutory application seeking the discharge of the injunction ordered on 17 May 2019 or, alternatively, that the injunction only operate in respect of Dialogue’s access to Facebook and not Instagram.
  • On 22 January 2020, PFM wrote to Gadens alleging that the Meta parties had been:

(a)          blocking Dialogue’s clients from accessing their Instagram accounts; and

(b)          informing Dialogue’s clients that sharing their account with a service that helps them get more “likes” or “followers” (which is alleged to be a reference to Dialogue’s Sked Social) was against the Meta parties’ “community guidelines”.

  1. On 24 January 2020, Dialogue filed an interlocutory application seeking, inter alia, further injunctions restraining the Meta parties from taking any action against the accounts of Dialogue’s clients and from informing users that use of Dialogue’s product was a violation of the community guidelines.
  2. In February 2020, evidence was filed in relation to the two interlocutory applications relating to the discharge and extension of the injunctions and a timetable for further amended pleadings and discovery was ordered by consent.
  3. On 11 March 2020, the Meta parties instructed Corrs Chambers Westgarth solicitors to replace Gadens.
  4. On 9 April 2020 – i.e., nearly one year after the proceeding was commenced – the Meta parties filed the interlocutory application the subject of this appeal seeking a stay of the proceeding pursuant to s 7(2)of the IAA.
  5. On 25 May 2020, Dialogue filed its cross-application that is the subject of its cross-appeal.

The primary judgment

  1. The primary judge held that Dialogue accepted the 2013 Terms and as such was a party to a binding arbitration agreement within the meaning of s 3(1)of the IAA: at [298]-[299]. His Honour found that as early as 14 January 2014 when Instagram first complained of Dialogue’s conduct, Dialogue had actual knowledge of the 2013 Terms: at [278]. Those findings are not challenged on appeal.
  2. The primary judge then considered whether s 7of the IAA That section relevantly provides:

(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.

(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.

  1. The primary judge found that ss 7(1)(a)and (d) were both satisfied and, accordingly, there was an arbitration agreement to which both ss 7(2)and (5) could apply: at [315]-[316]. As to the applicability of s 7(2), the primary judge found para (a) to be clearly satisfied: at [317]. As regards para (b), the primary judge held that the scope of the arbitration agreement is broad as it applies to “all disputes ‘with regard to’ the relationship between Dialogue and Instagram, LLC”: at [401]-[402]. Nonetheless, his Honour considered that the relationship referred to was that during the currency of the 2013 Terms: at [403]. Accordingly, his Honour held that the 2013 Terms, and hence the scope of the arbitration agreement, did not extend to the claims that arose after 19 April 2018: at [431]. Nor were claims relating to Dialogue’s use of Facebook or the Competition Claims within the scope of the arbitration agreement: at [421] and [434].
  • Nonetheless, the primary judge considered that Dialogue’s alleged conduct, and the dispute between Dialogue and Instagram, commenced and continued during the currency of the 2013 Terms: at [441]. That some matters fell outside the scope of the arbitration agreement did not change the fact that s 7(2)(b)had otherwise been satisfied: at [443]. The primary judge concluded that unless it was found that the arbitration agreement was “null and void, inoperative or incapable of being performed” under s 7(5), s 7(2)required that the proceeding be stayed. Those conclusions are not challenged on appeal.
  • The primary judge dealt with three challenges to the otherwise mandated stay under s 7(2). The first was the cross-application by Dialogue by which it contended that to the extent that the arbitration clause was incorporated as a term of the contract between Dialogue and Instagram, it is an unfair term within the meaning of s 24 of the ACL. Dialogue sought a declaration that the term was void. The second was that, by including or seeking to enforce the arbitration agreement as a term in the contract, Instagram engaged in conduct that was in all the circumstances unconscionable contrary to s 21 of the ACL. Dialogue sought an injunction preventing reliance on the term. The third was that the Meta parties waived their right to arbitrate such that the agreement was unenforceable and therefore inoperative under s 7(5)of the IAA.
  • The primary judge rejected the first two challenges but upheld the third challenge based on waiver: at [590]. As his Honour’s findings on the second challenge are not subject to appeal or cross-appeal, it is unnecessary to say anything more about it here.

ACL s 24

  1. His Honour rejected Dialogue’s challenge to the operability of the arbitration agreement on the basis that it was an unfair term contrary to s 24 of the ACL: at [320]-[360]. In view of my conclusion that his Honour was correct in concluding that the Meta parties waived any reliance on the arbitration agreement and that it was for that reason inoperative, it is not necessary to canvass his Honour’s reasoning in support of his conclusion on the unfair contract term point.

Waiver

  • Having decided that Dialogue’s cross-application challenging the validity of the arbitration agreement under the ACL failed, the primary judge then turned to the issue of waiver in the context of s 7(5)of the IAA, it being common ground that a waiver of the arbitration agreement makes it “inoperative” within the meaning of that subsection. That issue had two components: the first was by what system of law was waiver to be determined; the second was whether, under that system of law, waiver was established.
  1. Although the primary judge accepted (at [155], [196] and [466]-[468]) that those issues are within the Kompetenz–Kompetenz principle – namely, that an arbitral tribunal may rule on its own jurisdiction including any challenge to the existence, validity and scope of an arbitration agreement (as expressed in Art 16 of the Model Law) – his Honour considered (at [201], [468] and [471]) that the Court was better placed to deal with those questions because they could be efficiently dealt with as a discrete exercise that did not require examination of the substantive matters in dispute.
  2. Turning then to the first component, one of the integers of the term constituting the arbitration agreement provided that “[t]his dispute resolution provision will be governed by the Federal Arbitration Act”. The primary judge accordingly found (at [476]) that the parties expressly chose the US Federal Arbitration Act (FAA) as the governing law of the arbitration agreement and held (at [480] and [495]) that, because there is a close connection between issues of validity and inoperability, the most consistent approach would be to apply the law governing validity of the agreement – i.e., the FAA – to questions of its inoperability.
  • Having determined that US federal law applied to the question of waiver, the primary judge then turned to consider its content. The Meta parties called an expert, Judge Ware, a retired judge who served as the Chief Judge of the US District Court for the Northern District of California, to give evidence. The primary judge summarised Judge Ware’s evidence as follows (at [499]):

Under US federal law and Californian law, which he said that I could treat as relevantly the same for present purposes, there is a strong policy in favour of enforcing arbitration agreements. A party who contends that a contractual right to arbitrate has been waived bears a heavy burden. He said that a party opposing arbitration must prove waiver by clear and convincing evidence. To meet the “clear and convincing” evidence standard, a Californian court must find that the party claiming waiver has presented evidence that is clear, explicit and unequivocal and leaves no substantial doubt that the right has been waived. He said that a party is deemed to have waived the right to enforce an arbitration agreement only upon clear and convincing evidence that it had engaged in an accumulation of substantial, voluntary and deliberate uses of the judicial forum, and that such voluntary uses of the machinery of litigation caused prejudice to the party opposing arbitration such that the opposing party had been deprived of the benefits of arbitration, namely, the expedient, efficient and cost effective resolution of the dispute.

  1. The relevant factors that were said by Judge Ware to require consideration were summarised by the primary judge as follows:

(1)          Whether the party moving for the stay initiated the litigation.

(2)          The nature of the moving party’s participation in the litigation before moving to compel reference to arbitration.

(3)          The state of the pleadings. In that respect, the failure to rely on an arbitration agreement as an affirmative defence is insufficient, by itself, to establish waiver.

(4)          The duration of the litigation before moving to compel arbitration. In that respect, Judge Ware opined that, in the circumstances of the litigation before the primary judge, the US District Court or Californian State court would not find that the duration of the litigation to be so inconsistent with a right to arbitrate that the Meta parties should be deemed to have waived that right.

(5)          That it was necessary for the party opposing arbitration to show that it would suffer prejudice, which prejudice must be proved by clear and convincing evidence and which must be more than the mere expenditure of money.

(6)          Whether the conduct of the moving party deprived the counterparty of the public policy benefits of an expeditious, efficient and cost-effective arbitration. Judge Ware opined that a US court would not find that Dialogue had been deprived of such benefits.

(7)          Whether the judicial process was used to gain something unavailable in arbitration. Judge Ware opined that the Meta parties had not gained information by way of discovery that they could not have gained in arbitration.

(8)          Whether the court has ruled in part or in whole upon the merits of the case. Judge Ware opined that a US court would not consider that there had been such judicial determinations in the proceeding before the primary judge.

  1. Save for the fifth factor relating to the requirement of prejudice to which I will return, the primary judge accepted the remaining factors to be relevant factors. However, his Honour expressly stated, in relation to each of the factors about which Judge Ware expressed an opinion as to how a US court would find, that the application of US law to the facts was a matter for him and not Judge Ware and that, to the extent that his report extended to such opinions, Judge Ware’s evidence was “hardly” admissible. The primary judge considered each factor for himself and concluded that the second, third, fourth and sixth factors weigh in favour of Dialogue.
  2. In relation to the fifth factor, being the requirement of prejudice, the primary judge was not convinced of the Meta parties’ analysis of the US cases in relation to the existence of prejudice being a requirement for waiver. The primary judge embarked on an analysis of the US cases and concluded that there were various different tests in each of the US Circuits in dealing with the question of waiver.
  • His Honour found (at [536]-[537]) that the Ninth Circuit, being the judicial circuit in which California is located, applies a three-pronged test to the question of waiver, which test requires establishing the existence of prejudice. However, his Honour found (at [539]-[540]) that the Tenth Circuit applies a six-pronged test, one of the elements of which is “whether the delay affected, misled or prejudiced the opposing party”. This six-pronged test is the test which Judge Ware focussed on and is that which his Honour found (at [541]) Californian State courts to apply. His Honour found (at [553]) that in the Seventh Circuit prejudice is not an essential element for a finding of waiver and is merely a relevant factor to be considered in all the circumstances. That is also the position, his Honour found (at [554]), in the DC Circuit.
  1. The primary judge preferred the opinion of Richard Posner, sitting as Chief Judge of the Seventh Circuit, in Cabinetreeof Wisconsin Inc v Kraftmaid Cabinetry Inc, 50 F 3d 388 (7th Cir, 1995), which opinion does not apply prejudice as a necessary condition for waiver: at [538] and [553]. The Meta parties submitted that Cabinetree is an outlier and that it was distinguished by the same circuit in three subsequent cases. However, his Honour considered that those cases did not expressly reject the approach adopted by Chief Judge Posner in Cabinetree: at [560]-[567]. His Honour concluded by observing (at [572]):

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.

  • The primary judge reached that conclusion in circumstances where Dialogue did not call its own expert and Judge Ware’s evidence was therefore uncontradicted by another witness.
  1. Although the primary judge found that prejudice is not an essential element to waiver under US law, his Honour also found that some US circuit courts require that the delay in moving to compel arbitration affected, misled or prejudiced the opposing party. His Honour considered that there is little doubt that Dialogue was affected or misled by the Meta parties. The primary judge addressed prejudice as follows (at [588]-[589]):

588         In my view there is or will be prejudice to Dialogue. The [Meta parties’] deliberate and inconsistent acts in the proceeding before me will have caused unnecessary expense, delay and inefficiency to Dialogue if I now accede to [their] application…

589         Finally, I should say something about public policy in light of the fact that at best for the [Meta parties] 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.

  1. The primary judge’s ultimate conclusion (at [590]) was that the Meta parties had waived their right to arbitration whatever US test was applied.

The appeal

  1. The Meta parties’ draft notice of appeal advances six grounds of appeal of which only five are pressed. They are:

(1)          Ground 1: It was wrong for the primary judge to determine the question of whether there had been a waiver of the right to arbitrate, which the arbitrator should determine in accordance with the Kompetenz–Kompetenz principle.

(2)          Grounds 2 and 3: The primary judge erred in failing to follow the uncontradicted expert opinion of retired Judge James Ware on US law and should have concluded that prejudice is an essential element of waiver.

(3)          Grounds 5 and 6: The primary judge should have found that Dialogue did not suffer prejudice under US law and that the Meta parties did not waive their right to arbitrate.

  1. In substance, the Meta parties contend that the primary judge should not have determined the question of waiver and, alternatively, that his Honour erred in his determination of the question. In my assessment, there was no error in the primary judge determining the question of waiver and that, regardless of whether his Honour erred in concluding that prejudice is not an essential element of waiver, relevant prejudice was established. It is therefore unnecessary to consider appeal grounds 2 and 3.

Whether the primary judge’s discretion miscarried

  1. The Meta parties accept that the question whether the issue of waiver should be determined by an arbitrator consistently with the Kompetenz–Kompetenz principle is a discretionary question. See Hancock Prospecting Pty Ltd v Rinehart[2017] FCAFC 170; 257 FCR 442 at [147]-[148], [367] and [377]-[378]. They contend, however, that the primary judge’s discretion miscarried in the sense contemplated by House v The King [1936] HCA 40; 55 CLR 499 (at 505) and that he should have referred the question to the arbitrator.
  2. As developed orally, they submit that once the primary judge embarked on a “voyage of discovery” of US law such that he found himself in a “sea of contestable propositions” (primary judgment at [18]), the resulting uncertainty was itself a factor that his Honour had to consider in the exercise of his discretion, which factor, it is said, his Honour failed to take into account. They say that had they known that the primary judge would find the law to be uncertain, they would have submitted before his Honour that that is quintessentially a reason why it should go to the arbitrator because the expertise and knowledge of US law the arbitrator would bring makes the arbitrator better placed to construe, interpret and apply that law.

Uncertainty before the primary judge

  1. The premise underlying the Meta parties’ submissions is that the question of the content of the US law of waiver in the hearing before the primary judge was, in the words of Senior Counsel, “absolutely clear and simple” and that his Honour only discovered the uncertainty after conducting his own research after the hearing himself. It may be accepted that, in referring at [539] to Peterson v Shearson/American Express Inc, 849 F 2d 464 (10th Cir, 1988) and at [555]to Hoxworth v Blinder, Robinson & Co Inc, 980 F 2d 912 (3rd Cir, 1992), being cases that do not appear on the record to have been referred to by the parties before the primary judge, the primary judge conducted his own research on US law after the hearing. Nonetheless, the premise is incorrect: the question of the content of the US law of waiver was very much a contested and live issue before his Honour.
  2. Although Dialogue did not call its own expert, Judge Ware was cross-examined extensively on the content of US law. As part of that cross-examination, Dialogue tendered a bundle of US cases that were put to Judge Ware, including Cabinetree, being the case on which the primary judge placed particular reliance. In that respect, the following appears from the transcript of the proceeding before the primary judge:

DR BIGOS [for Dialogue]: … Can – can you go to attachment 9, please, to the emails?—Yes.

A case called Cabinetree …..?—Yes.

Yes. And it’s a decision of the Court of Appeals Seventh Circuit from 1995?—I see that.

Yes. And Chief Judge Posner was one of the members of the bench in that case?—Yes.

The fourth principle is:

To establish a waiver of the contractual right to arbitrate, a party need not show that it would be prejudiced if the stay were granted and arbitration ensued.

?—I believe that the court is correctly citing what was said in the St Mary’s case.

  • Later, after putting the case of Rankin v Allstate Insurance Co, 336 F 3d 8 (1st Cir, 2003) to Judge Ware, the following exchange took place:

DR BIGOS: … And the last sentence there, in that paragraph, says:

Where we are dealing with a forfeiture by inaction (as opposed to an explicit waiver), the components of waiver of an arbitration clause are undue delay and a modicum of prejudice to the other side.

Yes?—I see that language, yes.

So only slight prejudice they say is required there?—You changed the word from “modicum” to “slight” – – –

Yes … but I … actually had to look it up in the dictionary to – what do you understand by “modicum”?—An amount.

An amount. Not a small amount?—I don’t – I haven’t – you know, I – in fairness to you, if you’ve looked it up – – –

….

If you go a few paragraphs down, about seven or so paragraphs down, there’s a paragraph that starts with:

In our view –

?—Yes.

Continuing:

In our view, this is enough in this case. The prejudice showing required is tame at best –

do you see that?—I see that language.

So we’ve looked at a number of different circuits in the US Appeals Court. We’ve looked at the Seventh Circuit, the DC Circuit, and First Circuit. And you would accept, wouldn’t you, that the question of whether, and the extent to which the Federal Arbitration Act requires prejudice in order to establish waiver of the right to arbitrate depends on which court in which circuit in the US is applying the FAA?—Different courts articulate the requirement with different language. At this point we’ve not talked about what prejudice means. The word is used and I see it being used, but it’s more important for US law, if we’re going to base it on principles of law under the FAA, to define the nature of prejudice.

Yes – – -?—What kind of prejudice is – does constitute waiver or forfeiture.

But you – there are some courts that don’t require any prejudice at all, or require only a small prejudice?—I understand your argument, but that’s not my understanding – – –

So you – do you agree or disagree with the proposition that whether, and the extent to which, prejudice is required in order to establish waiver of the right to arbitrate depends on which court in which circuit in the US is applying the FAA?—No, I wouldn’t agree with that, because that would mean that the law, the principles of law, are purely individual. That is not a principle of law then. If what you’re saying is, “Everybody gets to decide that”, then it doesn’t become a principle, by definition.

  1. The foregoing extracts make clear that the question of whether prejudice is an essential element of the US law of waiver and, if so, what extent of prejudice is required to be shown, was a live issue before the primary judge. Indeed, the uncertainty in that respect attracted a number of questions from the Bench directed to Judge Ware. As identified on behalf of Dialogue in this Court on appeal, the primary judge stated three times during Judge Ware’s cross-examination that he was going to review the cases for himself, a course which no party spoke against. Also, the primary judge invited further written submissions from the Meta parties on the cases that were put by Dialogue to Judge Ware in cross-examination. Those submissions included an extensive attack on Dialogue’s reliance on Cabinetree. It is therefore not the case that the primary judge only discovered the uncertainty in his own subsequent review of the US cases. If there was no uncertainty, the issue could not have been the subject of such a contest.
  • Nor can it realistically be concluded that the primary judge failed to take the uncertainty into account in exercising his discretion to decide the question of waiver himself rather than refer it to the arbitrator. True it is that his Honour did not explicitly state that he took uncertainty as a factor into account. But that hardly needed to be stated and it would be wrong to infer that the primary judge failed to consider it in circumstances where the uncertainty of US law was discussed over many paragraphs of his reasons and was clearly at the forefront of his Honour’s consciousness. In the circumstances, the proper inference to draw is that his Honour was cognisant of that uncertainty and took it into account. Accordingly, there was no miscarriage of the primary judge’s exercise of discretion to determine the question of whether there had been a waiver of the right to arbitrate.
  1. For these reasons, the Meta parties’ first ground of appeal fails.

The governing law and jurisdiction clause

  1. Dialogue also submits that the first ground of appeal fails for another reason.
  • As set out above at [12], the governing law and jurisdiction clause provides that for any action “relating to the arbitration provision of the [2013 Terms]”, Dialogue agreed to resolve any dispute with Instagram “in a state or federal court located in Santa Clara, California for the purpose of litigating all such disputes”. Although no party asked for the question of waiver to be determined by a court in California, Dialogue submits that, in providing for disputes concerning the arbitration provision to be determined exclusively by such a court, the contract by necessary implication excludes the jurisdiction of the arbitrator in respect of such matters. It is said therefore that the premise that a US arbitrator would be the alternative determinant of the question of waiver is flawed.
  1. In view of my conclusion that appeal ground 1 in any event fails, and although this point arises logically prior to the preceding point, it is unnecessary to decide it.

Whether Dialogue was prejudiced

  1. The ultimate question that is dispositive of the balance of the appeal is whether Dialogue was prejudiced by the conduct of the Meta parties. It will be recalled that the primary judge held that prejudice need not be shown in order to establish waiver under US law. However, the primary judge also held (at [557] and [588]) that if prejudice is a requirement to establish waiver under US law, Dialogue had in any event established prejudice. As mentioned, his Honour’s ultimate conclusion (at [590]) was that the Meta parties waived their right to arbitrate “whatever US test is applied”.
  2. The standard of prejudice on which the primary judge relied is whether a delay “affected, misled or prejudiced” Dialogue: at [556], [557]. The Meta parties impugn the primary judge’s reliance on this standard. They submit that the correct standard of prejudice is that which is expressed in Judge Ware’s expert report which they summarise as being that:

“the party opposing arbitration must prove by clear and convincing evidence that it was prejudiced by the litigation conduct of the moving party”, and “the prejudice must be more than the expenditure of money to pursue the civil case before a motion to compel arbitration is made”. To show this, “there must be a loss of the benefits of arbitration – expedient, efficient and cost-effective resolution of disputes”. “[C]ourts will not find prejudice where the party opposing … arbitration has expended only litigation and court costs, unless the parties have already conducted significant discovery that would be unavailable in an arbitration, or if the matter is on the eve of trial.”

  • The Meta parties submit that if the primary judge had applied that standard, he would have found that Dialogue had failed to establish prejudice with the result that the Meta parties did not waive reliance on the arbitration agreement.
  1. It may be assumed for the purposes of deciding the appeal, and as submitted by the Meta parties, that the prejudice to be assessed refers solely to the effect of the Meta parties’ litigation conduct, which conduct must be inconsistent with reliance on the right to arbitrate. On Judge Ware’s evidence, the conduct to be assessed for prejudice is the Meta parties’ voluntary use of the litigation machinery. It includes the nature of a party’s participation in the litigation before moving to compel arbitration, the failure of a party to raise the right to arbitrate as an affirmative defence, and the duration of the delay before a motion to compel arbitration is filed. The upshot is that, contrary to the assumption underpinning Dialogue’s submissions, any alleged prejudice that would result from Dialogue having to instruct US lawyers or having ACL claims resolved by a US arbitrator instead of an Australian court is irrelevant because that conduct is not that of the Meta parties’ voluntary use of the litigation machinery.
  • It may also be assumed, for the purposes of deciding the appeal, that Dialogue needs to show prejudice resulting from such conduct and not just that it was affected or misled.
  1. Nonetheless, the Meta parties’ submission that Dialogue was not relevantly prejudiced should be rejected.

The conduct of the Meta parties

  1. As mentioned, the Meta parties filed a defence on 23 August 2019 and an amended defence on 30 September 2019, neither of which relied on the arbitration agreement. The Meta parties’ application for a stay of the proceeding under s 7(2)of the IAAwas filed almost one year after the commencement of the proceeding. The failure of the Meta parties to rely on the arbitration agreement in the defences they filed and the delay in moving to compel arbitration forms part of the conduct that must be assessed for prejudice. That does not, however, exhaust the conduct relevant to the inquiry. The conduct to be assessed also includes the notices to produce and the request for further and better particulars served on Dialogue, as well as correspondence between the parties on proposed categories of discovery.

Notices to produce

  1. On 30 August 2019, the Meta parties served on Dialogue a notice to produce (First Notice) in accordance with r 31of the Federal Court Rules 2011 (Cth). The First Notice was extensive and sought 36 documents referred to in an affidavit of Mr Stephens, the concise statement and statement of claim. One of the items of which production was sought was the 2013 Terms. That is relevant only to the arbitrable claims. Also, since the Meta parties had already filed a defence, production of the documents was not required for the purpose of pleading and can be taken to have been for the purpose of trial.
  2. By letter dated 5 September 2019, PFM responded to the First Notice and stated that:

The Notice to Produce requests a significant volume of material and our client will require additional time in order to collate them [sic]. Consequently, we propose to provide inspection on a rolling basis as material becomes available, commencing Monday, 9 September 2019.

  1. PFM’s letter also foreshadowed that it would seek confidentiality undertakings in respect of some of the documents sought to be produced. Annexed to the letter was a schedule that listed each document sought and noted in respect of each of them whether it had already been produced, whether a document was no longer in Dialogue’s control or no longer existed, and whether a confidentiality undertaking would be sought in respect of a particular document.
  2. Further correspondence between the parties ensued concerning the proposed confidentiality undertaking and documents sought for production. In particular, by letter dated 26 September 2019, PFM indicated that it was making enquiries of Dialogue’s service providers to produce documents to Dialogue so that they could be produced to the Meta parties. In relation to two other of the Meta parties’ requests, PFM said:

We are obtaining further instructions in relation to request numbers 16 and 17, being the support requests submitted to the Applicant and the Applicant’s responses. These documents total approximately 2,000 pages, all of which need to be reviewed for relevance and confidential information. We expect to complete our review by early next week.

  1. By letter dated 11 November 2019, Gadens wrote to PFM requesting that it provide electronic copies of the documents available to be inspected by 18 November 2019.
  2. On 12 November 2019, the Meta parties served on Dialogue a second notice to produce in accordance with r 31(Second Notice). Since the Meta parties had already filed an amended defence, the Second Notice can also be taken to have been for the purpose of trial and not for the purpose of pleading.
  3. On 15 November 2019, the primary judge made orders providing for the Meta parties to file and serve any application for the production and inspection of documents sought in the First and Second Notices by 7 February 2020.
  4. By separate letters dated 18 November 2019, PFM responded to both the First and Second Notices. In respect of the First Notice, PFM explained a number of corrections to its previous response and stated that Dialogue had made further enquiries of its service providers to produce documents sought by the Meta parties but was unable to gain access to those documents. The letter also stated:

2.2          Please find attached copies of the documents responsive to your clients’ First Notice to Produce which are within Dialogue’s control and not subject to confidentiality.

2.3          Please note that some of the documents responsive to requests 16 and 17 are in foreign languages. For those documents, we also provide a translated version by a NAATI certified translator.

Request for further and better particulars

  1. On 30 August 2019, the Meta parties served on Dialogue a request for further and better particulars of Dialogue’s statement of claim (RFP). Gadens’ covering letter expressly reserved the Meta parties’ right to apply for an order for the particulars under r 45of the Rules.
  2. The RFP was extensive. It sought further particulars of allegations that related to both Instagram and Facebook, as well as periods inside and outside the currency of the 2013 Terms. It therefore sought further particulars of both arbitrable and non-arbitrable claims. In particular, the Meta parties sought particulars of all material facts, matters and circumstances relied on to allege that:

(a)          [Dialogue’s] product did not and does not solicit, collect or use the login credentials of Instagram users;

(b)          [Dialogue’s] product did not and does not automate access to the Instagram platform without permission …

  • As will be recalled, these issues are at the heart of Instagram’s stated concerns from January 2014. They are clearly within the scope of the arbitration agreement. None of the requests was directed at the Competition Claims. Also, since a defence had already been filed, none of the requests was for the purpose of pleading; each can be taken to have been for the purpose of trial.
  1. By letter dated 17 October 2019, PFM responded to each and every integer of the RFP. The primary judge made orders on 15 November 2019 providing for a further request by the Meta parties for further and better particulars by 22 November 2019 and a response by Dialogue by 13 December 2019.
  2. By letter dated 22 November 2019, Gadens wrote to PFM stating that the Meta parties considered that Dialogue’s amended statement of claim, which was filed on 6 September 2019, remained inadequately particularised. Gadens repeated various of its requests made in its RFP and rejected as insufficient many of PFM’s responses earlier provided.
  3. By letter dated 13 December 2019, PFM responded to Gadens by mostly repeating what it had said in its first response to the RFP, although it did provide a few additional particulars.

Discovery

  1. As mentioned, on 21 October 2019 the parties exchanged proposed categories of documents that they would seek from each other by way of discovery. That was done in accordance with timetabling orders made and subsequently extended by consent and in that sense the Meta parties’ conduct can be taken to be voluntary. PFM listed 27 categories and Gadens listed 22 categories. Several of the categories in both lists contained further subcategories. In short, both sides of the case indicated that they would seek substantial discovery from each other, and they put in considerable effort in formulating the categories. The categories covered arbitrable and non-arbitrable claims.
  2. By letter dated 25 October 2019, Gadens responded in detail to the proposed categories of documents from PFM which would be sought from the Meta parties on discovery. By letter dated 31 October 2019, PFM responded in detail to Gadens’ letter.
  3. By letter dated 4 November 2019, PFM responded in detail to the proposed categories of documents from Gadens which would be sought from Dialogue on discovery.

Summary of the Meta parties’ litigation conduct

  1. Senior Counsel for the Meta parties sought to characterise their conduct in the litigation as merely responsive and defensive in nature. That characterisation entailed emphasising the fact that the only application made by the Meta parties prior to its application for a stay was an application to discharge or vary the interlocutory injunction sought by Dialogue and granted by the primary judge.
  2. However, and as mentioned, the conduct of the Meta parties includes the filing of defences that failed to rely on the arbitration agreement, the delay of almost one year in asserting the right to arbitrate, the various notices to produce, the RFP and extensive correspondence on discovery. The Meta parties’ conduct was inconsistent with reliance on the right to arbitrate. In particular, the two notices to produce and the RFP served by the Meta parties constitute a voluntary use of the litigation machinery that sought documents referred to in pleadings and affidavits filed in the Court and further particulars of Dialogue’s statement of claim as variously amended. Those notices and the RFP are not merely responsive and defensive in nature in the same way as might be said of the application to vary the injunction. That is all the more so because the documents sought by the notices and the further particulars sought in the RFP were not necessary to plead to Dialogue’s statement of claim; the Meta parties had already responded to the claim by filing defences. Rather, the conduct in serving the notices and RFP were steps taken in contemplation of litigating the factual allegations made by Dialogue in the court proceeding and not in arbitration.
  • Further, although the service of the notices and RFP did not involve an application to the Court, they nonetheless involved the use of litigation machinery that compelled compliance by Dialogue. The notices to produce were drafted on Form 39 in accordance with r 31(1)of the Rules which, by sub-r (2), required Dialogue to respond within four days after being served with the notices stating, inter alia, when and where the documents sought to be produced may be inspected. Any failure by Dialogue to comply with sub‑r (2) then permitted the Meta parties to apply for an order for production of the documents sought by the notices, a course in respect of which the primary judge made timetabling orders presumably on the request of the Meta parties. Also, the RFP was served under cover of a letter that stated that the Meta parties reserved their rights to apply for an order for particulars under r 16.45. As mentioned, the primary judge made orders for the provision of a further request by the Meta parties. The same reservation appears at the end of Gadens’ letter of 22 November 2019 that was served in accordance with the orders of the primary judge.
  1. On any view, the serving of the notices and the RFP constituted a voluntary use of the machinery of litigation as a means of compelling responses from Dialogue for the purpose of actively defending the claims, including the arbitrable claims, in the litigation. The correspondence on discovery, as required by court order, inevitably entailed incurring legal costs. The issue is whether such conduct, including the delay thereby caused, caused relevant prejudice to Dialogue.

The prejudice caused by the Meta parties’ litigation conduct

  1. On Judge Ware’s evidence, factors relevant to the consideration of whether prejudice exists are the following:

(1)          whether the important public policy advanced by arbitration, being the expedient, efficient and cost-effective resolution of disputes, has substantially been undermined;

(2)          whether the party moving to compel arbitration has used the judicial process to gain something that could not have been gained in arbitration; and

(3)          whether the court has made rulings going to the merits of the case.

  1. In the present case, the primary judge made no findings going to the merits of the case. The first and second factors are, however, relevant to the assessment of prejudice.

Loss of the benefits of arbitration

  1. The primary judge held (at [588]) that the Meta parties’ conduct in the proceeding below will have caused unnecessary expense, delay and inefficiency to Dialogue if the stay application were acceded to. In other words, Dialogue would have lost the benefits of arbitration, which is precisely one of the effects that, on Judge Ware’s evidence, establishes prejudice.
  2. As canvassed above, PFM spent significant time conducting work in responding to the various notices to produce, the RFP and Gadens’ correspondence on discovery, all of which covered both arbitrable and non-arbitrable claims. In addition to the delay, it can be inferred that undertaking this work also caused Dialogue to incur significant expense. The Meta parties submit that if the arbitration agreement had been raised at an earlier time, not a single thing different would have occurred and, as such, there is no prejudice. That submission is premised on the complaint that the primary judge did not undertake a rigorous delineation of whether the steps taken by the parties were referrable to arbitrable or non-arbitrable claims. They say that those steps which are referrable to the non-arbitrable claims would have been taken in any event and that any expense or delay referrable to those claims is entirely irrelevant to whether Dialogue suffered prejudice.
  • Support for the proposition that the steps and delay in respect of non-arbitrable claims is irrelevant can be found in Fisherv AG Becker Paribas Inc, 791 F 2d 691 (9th Cir, 1986). Fisherconcerned a complaint filed in the US District Court of Idaho alleging violations of US federal securities laws, which were non-arbitrable, as well as state and common law claims. The plaintiffs, the Fishers, had signed a number of agreements with Becker, a stock brokerage firm, each of which contained an arbitration clause. Because of the acceptance of the intertwining doctrine at the time the complaint was filed, which doctrine held that arbitration should be denied where common law claims are intertwined with securities law violations, Becker did not move to compel arbitration. That doctrine was subsequently rejected by the US Supreme Court in Dean Witter Reynolds, Inc v Byrd, 470 US 213 (1985). Consequently, Becker moved to compel arbitration three-and-a-half years after the Fishers’ complaint was filed, during which time the parties had engaged in extensive discovery.
  1. The Ninth Circuit held, first, that the failure of Becker to move to compel arbitration earlier was not inconsistent with its right to arbitration because the acceptance of the intertwining doctrine had the result that the arbitration agreement was unenforceable until Byrdwas decided; Becker had properly perceived that it was futile to file a motion to compel arbitration until Byrd was decided. The Ninth Circuit further held that Becker’s late assertion of its right to arbitrate was not prejudicial to the Fishers because the extensive discovery they had undertaken would be available for the trial of the non-arbitrable claims, which claims would remain in the US District Court. As such, the time, money and effort expended in conducting that discovery did not constitute sufficient prejudice.
  • The Meta parties’ submission assumes that the non-arbitrable claims would continue in the Court parallel to any arbitral proceedings. If that would be the case, then Fishermight have been of assistance. However, the submission that the steps referrable to the non-arbitrable claims would nonetheless have been taken by Dialogue if an application to compel arbitration was filed earlier rings hollow in circumstances where the Meta parties seek a stay of the entire proceeding, either permanently or temporarily pending determination of the arbitration. That is to say, if the Meta parties’ application was acceded to, there would be no parallel proceedings. The proceeding in the Court would have been stayed and, depending on the outcome of the arbitration, the steps in fact taken by Dialogue might not have been required or the scope of what was required of it might have been different. At the very least, it would not have been required to participate in ongoing litigation in the Court and the preliminary steps that entails. As such, the belated reliance by the Meta parties on the arbitration agreement caused Dialogue to lose the benefits of arbitration, namely the expedient, efficient and cost-effective resolution of disputes and it caused Dialogue to engage in time-consuming and costly litigation steps that might be wasted. Accordingly, the primary judge was correct to find that Dialogue was prejudiced by the Meta parties’ litigation conduct, whatever US test is applied.
  1. Further, as mentioned at [68] and [77] above, even if there were to be parallel proceedings, the notices to produce, the RFP and the categories of documents for discovery relate to both arbitrable and non-arbitrable claims. The work undertaken in responding to the integers of those notices and the RFP and the categories of documents that relate to the arbitrable claims would be wasted in respect of the trial of the non-arbitrable claims in the Court.
  2. The Meta parties also rely on Newirthv Aegis Senior Communities, LLC, 931 F 3d 935 (9th Cir, 2019), in which Fisherwas cited with approval. In that case, the plaintiffs filed a class action complaint in a Californian state court in breach of an arbitration agreement. The defendant, Aegis, removed the complaint to the US District Court and filed a motion to compel arbitration and a motion to dismiss. Aegis did not pursue those motions and, pursuant to an agreement between the parties, the plaintiffs filed an amended complaint. Aegis then filed a second motion to dismiss.
  3. In the intervening period, whilst the second motion to dismiss was pending, the parties actively participated in pre-trial steps, including submitting a joint report with a proposed schedule for discovery, a class certification briefing and hearing dates for trial. The second motion to dismiss was finally denied eight months after it was filed. Two months later, Aegis filed another motion to compel arbitration. 
  4. In relation to prejudice, the Ninth Circuit held that the plaintiffs were not prejudiced by Aegis’ participation in discovery, scheduling conferences, and developing proposed orders. Rather, they were prejudiced by the costs incurred in defending Aegis’ motion to dismiss on the merits. The Meta parties submit that that is the only way in which a party resisting arbitration can establish waiver. (See also Saint AgnesMedical Center v PacifiCare of California, 31 Cal 4th 1187 (SC Cal, 2003).)
  5. However, as the US authorities before the Court explain, a plaintiff who commences a proceeding in court in breach of an arbitration agreement may nonetheless show prejudice if the defendant has engaged in acts that are inconsistent with its right to arbitrate and the plaintiff has incurred costs due to such acts. This is satisfied not only where the plaintiffs would be forced to re-litigate an issue on the merits (such as when the defendant has filed, and the court has determined, a motion to dismiss), but also when the defendants have sought and received an advantage from litigation in court that they would not have received in arbitration. See Newirthat 944; Saint Agnes at 1204. That requires consideration of the second of Judge Ware’s factors.

Gaining something unavailable in arbitration

  1. The Meta parties accept that taking advantage of a process which would not be available in an arbitration constitutes prejudice. They deny, however, that there has been any such benefit.
  2. In the present case, the Meta parties served two notices to produce on Dialogue prior to the application for a stay. As mentioned, Dialogue was required by r 31(2)to respond to those notices stating, inter alia, when and where the documents sought to be produced may be inspected. Whether that is a process that would have been available to the Meta parties in arbitration requires consideration of the American Arbitration Association’s rules, being the relevant rules incorporated by the arbitration clause, R-22 of which relevantly provides:

R-22.   Exchange of Information between the Parties

(a)          If any party asks or if the arbitrator decides on his or her own, keeping in mind that arbitration must remain a fast and economical process, the arbitrator may direct

1)           specific documents and other information to be shared between the consumer and business, …

(b)          Any exhibits the parties plan to submit at the hearing need to be shared between the parties at least five business days before the hearing, unless the arbitrator sets a different exchange date.

(c)          No other exchange of information beyond what is provided for in section (a) above is contemplated under these Rules, unless an arbitrator determines further information exchange is needed to provide for a fundamentally fair process.

  1. Rule-22 sets out the obligations of a party in the arbitration to provide documents. Section (b) provides that parties must share exhibits they plan to submit at the hearing at least five business days before the hearing. It does not deal with documents sought to be inspected by the counterparty which will not be exhibited at the hearing. Section (a) provides for the sharing of specific documents between the parties on direction from the arbitrator, which decision should be made keeping in mind that arbitration must remain a fast and economical process. By section (c), there is to be no other exchange of information between the parties except for that provided for in section (a) unless an arbitrator otherwise determines that it is needed to provide a fundamentally fair process – that is to say, there is to be no exchange of documents unless the arbitrator directs as such.
  2. As can be seen, there is no process by which one party can simply serve a notice on the other party to produce documents, with which notice the party served must comply. The Meta parties took advantage of such a process in the proceeding before the primary judge, which process caused Dialogue to undertake significant work in responding to the notices. The First Notice in particular took Dialogue almost three months with which to comply. It appears from the correspondence between PFM and Gadens that it required PFM to review a significant volume of documents. Some of the documents were in a foreign language and thus required certified translations which PFM then procured and produced. Dialogue would not have been required to respond, as it was in the Court, to any such notice if it was issued in arbitration. Accordingly, the Meta parties have taken advantage of a process which would not be available in an arbitration. This constitutes relevant prejudice.

Conclusion on prejudice

  1. Both the first and second of Judge Ware’s factors are present in this case. In the circumstances, they amount to sufficient prejudice to Dialogue to establish waiver by the Meta parties. Accordingly, grounds 5 and 6 of the Meta parties’ appeal fails. It follows that the Meta parties’ appeal must be dismissed.

Disposition

  1. As the Meta parties’ appeal fails, Dialogue’s cross-appeal and notice of contention do not arise for consideration. The cross-appeal should accordingly be dismissed. Because Dialogue has in substance entirely succeeded in this Court on appeal, it is appropriate that the Meta parties pay Dialogue’s costs of the appeal and cross-appeal.  
  2. I would make the following orders:

(1)          Leave to appeal be granted.

(2)          The appeal be dismissed.

(3)          The cross-appeal be dismissed.

(4)          The appellants pay the respondent’s costs of the appeal and cross-appeal.

I certify that the preceding one hundred and five (105) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Associate:

Dated:       4 February 2022

SCHEDULE OF PARTIES

 VID 42 of 2021
Appellants 
Fourth Appellant:INSTAGRAM LLC
Cross-Respondents 
Second Cross-RespondentMETA PLATFORMS INC
Third Cross-RespondentFACEBOOK IRELAND LTD
Fourth Cross-RespondentINSTAGRAM LLC
End