One of the most confounding doctrines in federal arbitration jurisprudence is the severability doctrine. The U.S. Supreme Court has held, since Prima Paint in 1967, that courts must enforce arbitration clauses within contracts, even if the entire contract is invalid or unenforceable. (Most non-arbitration geeks don’t believe me when I tell them that’s the law.) The only time a court can address the argument for invalidity is if the litigant directs it specifically at the arbitration clause. For example, an argument that the elves’ contract with Santa is invalid because it’s illegal to pay them in candy canes is an argument about the contract as a whole, and would get sent to arbitration if the elves’ contract had a valid arbitration clause. On the other hand, an argument that the arbitration clause in the elves’ contract with Santa is unconscionable because it calls for arbitration in the South Pole with Mrs. Claus as the arbitrator *is* specific to the arbitration clause, and should be decided by the court. Unless, of course, the arbitration clause clearly and unmistakably delegated questions of validity to an arbitrator…
Two courts recently had an opportunity to remind litigants of the severability doctrine. In Rogers v. Swepi LP, 2018 WL 6444014 (6th Cir. Dec. 10, 2018), the Sixth Circuit reversed a district court judge who failed to apply the severability doctrine. In Rogers, a putative class of landowners brought suit against Shell for claims arising out of lease agreements. Shell responded by moving to compel arbitration. The landowners argued that the arbitration clause within the lease agreement (as well as the whole “second phase” of the lease) was only triggered upon payment of a bonus. The court found this was an attack on more than just the arbitration clause, and therefore application of the severability doctrine called for the issue of arbitrability to be decided by an arbitrator. (However, whether class arbitration was permissible should be decided by the court on remand.)
Similarly, the Supreme Court of Montana sent a dispute over arbitrability to an arbitrator in Peeler v. Rocky Mountain Log Homes Canada, Inc., 2018 WL 6498693 (Mont. Dec 11, 2018). In Peeler, an owner sued both the design professional and contractor over claims relating to construction of a custom log home. Only the contractor’s agreement had an arbitration clause, but the complaint alleged the design firm was an affiliated entity that should be treated the same as the contractor. So the contractor and design firm moved to compel arbitration. The homeowner argued that the arbitration agreement was permissive, not mandatory, and that the defendants had waived their right to arbitrate by waiting to assert it until after he filed suit. Those arguments did not prevail at the trial court or the appellate court. The Montana Supreme Court noted that the defendants did not waive their right to arbitrate, and because the owner did not challenge the validity or enforceability of the arbitration agreement, his arguments should be heard by an arbitrator. Finally, the court found that the design firm could compel arbitration as a matter of equitable estoppel.
Speaking of construction cases, the Supreme Court of Nevada continues its campaign to remind all construction litigators that the FEDERAL Arbitration Act governs even local disputes between homeowners and contractors. Since its Ballasteros decision in February of this year, it has issued two more decisions reiterating that holding: Lanier, 2018 WL 6264809 (Nev. Nov. 28, 2018), and Greystone Nevada, 2018 WL 6264756 (Ne. Nov. 28, 2018). As evidence of interstate commerce, Lanier points to three things: the builder was incorporated in Delaware while the homeowners were Nevada residents, the large number of subcontractors and material suppliers who worked on the home made it likely that at least some of them are engaged in interstate commerce, and “in the aggregate, the general practice of developing, buying, and selling homes substantially affects interstate commerce.” All of this mattered because trial court judges were relying on Nevada anti-arbitration rules to refuse to compel arbitration. Those rules are preempted if the dispute is governed by the FAA.