Perry Street Software, Inc. v. Jedi Technologies, Inc.

Background

Perry Street makes mobile applications, including SCRUFF and Jack’d. Jedi holds U.S. Patent No. 10,164,918 and accused SCRUFF of infringing that patent. Perry Street filed this case seeking a declaration that SCRUFF did not infringe the patent. Perry Street later added a claim seeking a declaration that the parties had to arbitrate their dispute. Jedi filed a counterclaim for patent infringement, seeking damages and injunctive relief.

SCRUFF’s sign-up screens displayed links to its Privacy Policy and Terms of Service. Users could continue without opening those documents, but the next screen stated that tapping “Next” meant agreeing to them. The Terms of Service included a mandatory arbitration clause, along with an exception allowing Perry Street and the user to seek court-ordered equitable relief concerning intellectual-property rights.

Jedi’s lawyer, Brian Haan, had downloaded and used SCRUFF while investigating possible infringement. Perry Street argued that Haan’s use of the app caused Jedi to agree to the Terms of Service and arbitration clause. Jedi denied that Haan’s actions showed Jedi’s agreement, arguing that he used the app to satisfy his duties under Federal Rule of Civil Procedure 11 before pursuing a patent claim.

Motions and legal framework

Jedi moved for a preliminary injunction against the arbitration that Perry Street had initiated with the American Arbitration Association. The court treated the requested relief as a temporary stay of arbitration while it developed the record. Perry Street filed a cross-motion to compel arbitration and separately moved to stay this court case while that motion was pending. Jedi also moved to strike certain statements in Perry Street’s answer to the counterclaim.

The court explained that an arbitration agreement is a contract and that a court decides whether the parties formed such an agreement. Under New York law, contract formation requires a sufficiently definite manifestation of mutual agreement. A lawyer’s representation of a client does not, by itself, give the lawyer unlimited authority to bind the client to a contract. The court said there must be evidence that the client intended, through words or actions, to agree to the terms through the lawyer’s actions.

Preliminary injunction

The court applied the four-part test for a preliminary injunction: likely success on the merits, likely irreparable harm without relief, a favorable balance of hardships, and consistency with the public interest. It found that Jedi was likely to succeed if the full record showed that Haan used SCRUFF for Rule 11 purposes. The court relied on the Rule 11 obligation to investigate the facts and law before filing a pleading, as well as decisions holding that an individual’s use of an online service did not bind a company without additional evidence that the company intended to be bound.

The court emphasized that Jedi had not submitted an affidavit from Haan explaining what he was doing when he accessed SCRUFF or why he did it. The court therefore did not make a final ruling on whether Jedi agreed to arbitrate. It concluded, however, that Jedi had shown a sufficient likelihood of success for temporary relief. The court also found that forcing a party that did not agree to arbitration would cause irreparable harm, that the balance of hardships favored preserving the status quo, and that enforcing an agreement to which a party had not agreed would not serve the public interest.

The court granted Jedi’s motion for a preliminary injunction staying the arbitration. The injunction was temporary and would remain in place until the court could decide the request for a permanent stay and Perry Street’s motion to compel arbitration. The parties were given 30 days to submit evidence addressing what Haan did and why he did it.

Other motions

The court deferred action on Perry Street’s motion to compel arbitration so the parties could complete the factual record. It noted that Jedi had also raised, but had not adequately briefed, an argument that Perry Street waived its right to demand arbitration by filing this lawsuit. The court said that issue could be considered when it finally decided the motion to compel.

The court denied Jedi’s motion to strike the phrase “the document or fact speaks for itself” from Perry Street’s answer to the counterclaim. The court also denied Perry Street’s motion to stay proceedings pending a decision on the motion to compel. However, for the next 30 days, proceedings were limited to matters needed to develop the record on the pending arbitration motions.

Disposition

The court granted the preliminary injunction until it could issue a final decision on the permanent stay request and the motion to compel arbitration. It did not finally decide whether Jedi was bound by SCRUFF’s arbitration clause or whether the patent dispute had to be arbitrated.