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.

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 

________

*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

A new case from the Sixth Circuit addresses whether accountants who are resolving a dispute about payments made under an agreement can also make legal determinations about the same agreement. In a 2-1 decision, the Sixth Circuit held that the scope of the dispute clause is broad enough to allow the accountants to resolve contract interpretation issues, as long as they are “relatively simple” and “closely related to accounting.” Shy v. Navistar Int’l Corp., __ F.3d__, 2015 WL 1383106 (6th Cir. March 27, 2015).

In Shy, Navistar was obligated to make annual contributions to a trust for its retired employees. The amount of the contribution was determined by a formula. If the committee managing the trust disputed the “information or calculation” provided by Navistar to support its contribution, and the parties could not resolve the dispute, the agreement provided that an accounting firm would resolve the dispute with a final and binding decision.

In this instance, the committee disputed how Navistar classified revenue when it was applying the formula. (The dissent states that “the gravamen of the [committee’s] allegations is that Navistar is engaging in a bad faith scheme to negate its substantive contractual duty to contribute a portion of its profits to fund the benefits of its retirees.”) The committee filed suit in federal court over those issues. Navistar responded by moving to compel arbitration, and the district court denied the motion. It found the claims fell within the scope of the arbitration clause, but that Navistar had waived its right to arbitrate.

On appeal, the Sixth Circuit reversed. It found that the claims were arbitrable, and that Navistar had not waived its right to arbitrate.

Why am I writing about accountants determining the application of a financial formula on an arbitration blog? Because contract clauses that allow an appraisal process to determine a value, or an accountant to resolve a financial dispute, are generally deemed arbitration clauses under federal law, even when no derivative of the word “arbitration” appears in the clause. As long as there is an independent adjudicator, substantive standards (like a contract) that apply, an opportunity for both sides to present their case, and a final decision, the process is deemed an arbitration that falls within the FAA.

And, in this decision, the Sixth Circuit found that the bean counters who determine how the formula applies were not limited to just counting beans. Because the contract clause called for the accountants to resolve disputes over “information or calculation,” the court held the language was broad enough to also encompass how Navistar categorized the information, and even “operational practices of Navistar” if those were closely tied to the information provided to the committee. The court did not exclude questions of contract interpretation from the scope of the arbitration, finding no indication the parties intended that limitation and finding the contract disputes at issue were “relatively simple” and “closely related to accounting.”

The dissent complained that the majority took the presumption in favor of arbitration too far. It accused the majority’s holding – that the accountants could determine legal questions that are closely connected to the financial questions –of having “no limiting principle.” “If applied as a general rule, any form of misconduct or bad faith dealing, or any fundamental change in the nature of the relevant business or transaction, could be characterized as an informational dispute…”

I find this an interesting case because many industries commonly use dispute mechanisms in which a specialist of some type is called on to resolve a specific type of dispute. (A panel of doctors determine whether you qualify for disability insurance, for example, or a panel of real estate appraisers determine the value of a property.) However, drafters of these clauses should take note that these clauses will be deemed arbitration clauses, and then the broad presumption of arbitrability will apply to the scope of those clauses. So, if you don’t want your bean counter to have the power to determine whether your beans are legal, these clauses must be written with carefully demarcated boundaries.