Arbitration is meant to be an alternate to litigation. Yet arbitration is itself the subject of much litigation over who must arbitrate, what must be arbitrated, whether and how the arbitration should proceed, and the deference courts must show to arbitration awards. This blog is intended to be a resource for litigators, in-house counsel, arbitrators and anyone else who wants to stay on top of the many thorny issues that arise under the Federal Arbitration Act. Our Bloggers →

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Rare Claim Falls Outside Arbitration Agreement, Creates Piecemeal Litigation

By Liz Kramer | February 6, 2015 in Scope of Arbitration Agreement

Because of the strong federal policy favoring arbitration, and cases providing that any doubt about the scope of an arbitration agreement must be resolved in favor of arbitration, it is uncommon to find a decision holding that the parties’ claims are not within the scope of their arbitration agreement.  But, the Supreme Court of Alabama held exactly that in Porter v. Williamson, __ So.3d__, 2015 WL 403081 (Ala. Jan. 30, 2015).

Porter involves a family drama in which two brothers owned investment companies, hired their nephew to work for them, and then made him a shareholder.  Twenty years later, they terminated the nephew and the litigation ensued.  The nephew claimed: 1)  specific performance of provisions of the shareholders agreement, requiring his uncles to buy his shares; 2) alternatively, rescission of the shareholders agreement; 3) misrepresentation; and 4) conversion.  The shareholder agreement’s arbitration clause said “Except for items of specific performance referred to above, any controversy or claim arising out of, resulting from or relating to this agreement shall be settled by arbitration in Birmingham, Alabama, in accordance with the Commercial Arbitration Rules of the [AAA]….”  The previous paragraph, entitled “specific performance,” allowed controversies “concerning the purchase or sale of” the shares of common stock to be heard in “a court of equity.”

The uncles moved to compel arbitration and the trial court denied it in full.  The Alabama Supreme Court took a more nuanced view, finding that the nephew’s claims 2-4 (rescission, misrepresentation, and conversion) were arbitrable.  But the claims “for specific performance and injunctive relief are not within the scope of the arbitration provision,” because they fell within the agreement’s carve-out for specific performance relating to buying and selling shares.  The court  cited SCOTUS’s Cocchi case for the proposition that “if a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation.”

Interestingly, there is no discussion in this case that the arbitrators should have decided the scope question based on the AAA rules (which give the arbitrator authority to determine his/her own jurisdiction).  Either the uncles did not see that issue, or they chose not to raise it, hoping that the court would find it inefficient to send some, but not all, claims to arbitration, and therefore keep all the claims in court.  Also interesting is the question: what happens next?  Usually court claims are stayed pending arbitration, but in this instance, it is more logical for the court claim to go first, as some of the other claims are pled in the alternative.

Want more state court arbitration news?  Of course you do.  Here are two recent state high court decisions, both pro-arbitration:

  • The Supreme Court of California “un-vacated” an arbitration award against an employee in Richey v. AutoNation, Inc., __ P.3d __, 2015 WL 363177 (Cal. Jan. 29, 2015).  Applying the state’s arbitration act, the Court rejected the idea that the arbitrator had exceeded his power by accepting a defense not available in California. The court noted the arbitrator found other, independent grounds for the result.
  • The Supreme Court of Louisiana affirmed an arbitration award in Mack Energy Co. v. Expert Oil & Gas, LLC, __ So. 3d __, 2015 WL 403209 (La. Jan. 28, 2015) (also applying the state arbitration act).  The losing party had argued that the arbitrator exceeded his power by giving an award outside the scope of the arbitration and by ordering the production of documents during arbitration.  The court disagreed.

 

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