There are only four ways to avoid an arbitration agreement. You can prove: 1) it was never formed; 2) it was formed, but is invalid under state law; 3) the current dispute is outside the scope of it; or 4) the other party waived their right to arbitrate (through litigation conduct). Today’s post is about the third method. Because of the federal presumption in favor of arbitrability, which applies when courts are determining whether the parties’ dispute falls within the scope of the clause, it is not the most common way to evade an arbitration agreement. Yet, I collected four recent decisions in which courts find the parties’ dispute is not covered by their arbitration agreement.
In Anderson v. Deere & Co., 2018 WL 5262778 (Mont. Oct. 23, 2018), the Montana Supreme Court found that a fight between John Deere Company and the former owner of one of its dealerships was not arbitrable. The Dealer Agreement had an arbitration clause obligating the Dealer, and its guarantors, officers, and shareholders, to arbitrate “any dispute” “between Dealer and Company.” The plaintiff signed the Dealer Agreement as managing partner of the Dealer and as guarantor. Later, the plaintiff sold his interest in the Dealer and sued Deere for tortious interference. The trial court denied the motion to compel and the supreme court affirmed. It focused on the language saying arbitrable disputes were those “between Dealer and Company,” and found that because the plaintiff alleged defendant committed torts against him personally, not as part of “Dealer,” there was no obligation to arbitrate. One judge wrote a special concurrence, disagreeing with the majority’s finding on scope.
In Perez v. DirecTV, 2018 WL 5115531 (9th Cir. Oct. 19, 2018), the 9th Circuit found the named plaintiff in a putative class action did not have to arbitrate her claims for violations of the Communications Act. DirecTV’s Customer Agreement with the plaintiff specifically exempted disputes “involving a violation of the Communications Act”. That sounds fairly straightforward, but one member of the panel dissented, finding the exception was ambiguous and therefore should have been resolved in favor of arbitration.
In Pictet Overseas Inc. v. Helvetia Trust, 2018 WL 4560685 (11th Cir. Sept. 24, 2018), the 11th Circuit affirmed a district court’s conclusion that the plaintiff’s claims were not arbitrable. The dispute was between investment trusts whose funds had been stolen, on one hand, and the owners and affiliates of a Swiss Bank on the other. The trusts started a FINRA arbitration, but the Swiss Bank objected that the claims did not belong in FINRA arbitration. FINRA Rule 12200 requires FINRA members and associated persons to arbitrate when the dispute “arises in connection with the business activities of the member or the associated person.” There was no dispute that the Swiss Bank was a FINRA member, but the court had to interpret the meaning of “business activities of ..the associated person.” The court concluded that “only disputes arising out of business activities of an associated person as an associated person are covered” by the rule and must be arbitrated. One judge concurred specially, to give further examples of why the rule could not be read the way the trusts advocated.
Finally, in Grand Summit Hotel Condominium United Owners’ Assoc. v. L.B.O. Holding, Inc., 2018 WL 4440370 (N.H. Sept. 18, 2018), the New Hampshire Supreme Court affirmed the lower court’s decision that the claims of condo owners against their property manager were not arbitrable. The parties’ arbitration agreement provided for decision by an independent public accountant of disputes over “actual costs” — pass-through costs of operation and maintenance — or management fees. The court “assume[d] without deciding that the provision is an arbitration clause and that the presumption in favor of arbitrability applies.” Even so, the court found that the disputes provision was narrow and because the owners did not dispute the Actual Costs, but instead sought damages caused by the manager’s misconduct (in failing to engage anyone to winterize the cooling tower), they were not obligated to arbitrate their claims.
Is this the new arbitration resistance?? Some kind of “scope-a-dope,” in which courts that don’t take kindly to arbitration can hold up their hands and say “I accepted that the arbitration agreement was formed, and that it was valid, but under state contract law, I interpret this claim as outside the scope.” That is a hard type of case to preempt under federal law, especially if it’s done without announcing a “rule” of contract interpretation.