FEDERAL COURT RULES THAT AN ARBITRATOR DECIDES WHETHER A CLAIM IS SUBJECT TO ARBITRATION WHEN THE ARBITRATION CLAUSE INCORPORATES THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION
By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, LLC
The question of whether a claim is subject to arbitration is ordinarily decided by the courts. However, when the parties incorporate the rules of the American Arbitration Association (AAA) into their contract to govern their arbitration agreement, the parties agree that an arbitrator will decide whether a claim is subject to arbitration.
In U.S. Nutraceuticals, LLC v. Cyanotech Corporation, 769 F.3d 1308 (11th Cir. 2014), a buyer and seller entered into two contracts, one in 2007, and another in 2010, under which the seller sold a certain item to the buyer. The 2007 contract contained an arbitration provision that required all disputes between the parties to be arbitrated. The 2010 contract also contained an arbitration provision that required all disputes between the parties to be arbitrated, except claims relating to breach of confidentiality agreements. The arbitration provisions in both contracts incorporated the rules of the AAA.
The relationship between the parties deteriorated, allegedly because the seller began conducting business directly with one of the buyer’s customers. The buyer further alleged that the seller improperly disclosed confidential information to the customer. After the seller refused to stop conducting business with the customer, the buyer sued the seller in Federal court for breach of the confidentiality agreement. The seller moved to compel arbitration under the terms of the contract. The buyer opposed the motion, arguing that the 2010 contract allowed the action for breach of the confidentiality agreement to be litigated in court. The lower court denied the seller’s motion to compel arbitration, and the seller appealed.
Under Federal law, the question of whether a dispute is subject to arbitration is an issue to be decided by the courts, unless the parties clearly and unmistakably agree that the arbitrator should decide whether the arbitration clause applies. The Court of Appeals reasoned that the parties in this case clearly and unmistakably agreed that the arbitrator will answer the question of whether the dispute was subject to arbitration because both contracts provided that disputes shall be conducted under the rules of the AAA1 . Thus, the Court of Appeals reversed the lower court, and held that the question of whether the buyer’s claim for breach of confidentiality agreement was subject to arbitration was for the arbitrator to decide, rather than the court, even though the 2010 contract exempted claims for breach of confidentiality from arbitration, because both contracts incorporate the AAA rules, and a factual dispute existed as to which contract governed.
This case demonstrates the importance of carefully drafting arbitration provisions in a contract. If the parties intend to have the arbitrator rule on whether a specific claim is subject to arbitration, the arbitration agreement must either explicitly state that such disputes are to be decided by the arbitrator, or incorporate the rules of the American Arbitration Association into the agreement.
About the Authors: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at firstname.lastname@example.org. For more information visithttps://www.florida-construction-lawyers.com. Roberts & Guttentag, LLC. in construction law including construction lien claims, payment and performance bond claims, construction contract preparation, construction and design defect claims, and appellate matters. He can be reached for consultation email@example.com.