Complete article first published in the February 2012 issue of Alternatives to the High Cost of Litigation available online to current subscribers.
The question: Is a motion to compel arbitration a sufficient response in federal court?
The issue: Will you also have to file an answer to a complaint under the Federal Rules of Civil Procedure? Bigger: Are you taking a risk by asking for arbitration?
The status: Federal courts seem to view a motion to compel as a responsive pleading. Know the law.
An often-overlooked conflict resolution problem is whether a defendant’s filing in federal court of a motion to compel arbitration constitutes a responsive pleading, so no further pleading is required.
Federal Rule of Civil Procedure 12, which addresses responsive pleadings and defense motions, is silent on the issue.
The significance is, of course, whether the defendant must also file an answer or motion under Rule 12, thereby potentially giving the plaintiff added information or wasting valuable time and court resources.
The first inquiry must be whether there is a valid arbitration provision in a commercial contract between the parties. Under some circumstances even nonsignatories to an arbitration agreement may be compelled to arbitrate. Comer v. Micor Inc., 436 F.3d 1098, 1101 (9th Cir. 2006) (obligation to arbitrate may extend to nonsignatories to the arbitration agreement under ordinary contract and agency principles); Omni Home Financing Inc. v. Hartford Life & Annuity Ins. Co., Benefit Systems, Inc., 2006 U.S. Dist. LEXIS 81767 (S.D. Cal. 2006); Legacy Wireless Services Inc. v. Human Capital L.L.C., 314 F.Supp.2d 1045, 105657 (D. Or. 2004) (nonsignatory directly benefited from an agreement with an arbitration clause because the nonsignatory received fees from signatories to the agreement); Hawkins v. KPMG LLP, 423 F.Supp.2d 1038, 1050 (N.D. Cal. 2006) (“Where a lawsuit against nonsignatories is inherently bound up with claims against a signatory, the court should compel arbitration in order to avoid denying the signatory the benefit of the arbitration clause, and in order to avoid duplicative litigation which undermines the efficiency of arbitration.”).
THE MAJORITY SAYS . . .
A majority of courts that have considered the issue have ruled that a motion to compel arbitration constitutes a responsive pleading, obviating the necessity for filing an answer or a Rule 12 motion.
In Smith v. Pay-Fone Systems Inc., 627 F. Supp. 121 (N.D. Ga., Atlanta Div., 1985), the Smiths, who are Georgia residents, entered into a franchise agreement with Pay-Fone, a California corporation. The franchise agreement contained an arbitration provision:
Except as may be precluded by specifically applicable law of the state in which the franchise business is located, any controversy, dispute, or claim arising out of or relating to this agreement that cannot be settled between the parties hereto by negotiation shall be settled by binding arbitration in accordance with the rules of and utilizing the services of the American Arbitration Association. The prevailing party in such action shall be entitled to reasonable attorney fees and costs, and judgment upon the award rendered by the arbitrators shall be entered in any court having jurisdiction.
Pay-Fone filed suit against the Smiths in California state court for breach of contract. The Smiths removed the case to federal court and moved to dismiss for lack of personal jurisdiction. The Smiths then filed suit against Pay-Fone in a Georgia federal court alleging price fixing under the Sherman Act, 15 U.S.C. § 1, and RICO violations (under the Racketeer Influenced and Corrupt Organizations Act at 18 U.S.C. § 1962(c)), among other claims.
Pay-Fone voluntarily dismissed the California action without prejudice and served the Smiths with a demand for arbitration. Pay-Fone also filed a motion to compel arbitration in the Georgia case.
The Smiths responded by arguing that Pay-Fone’s motion failed to meet the requirements of an answer under the federal rules and that Pay-Fone therefore was in default. The court rejected the argument, pointing out:
It is true that defendants have failed to file answers to plaintiffs’ complaint, as required by Rule 7, Fed. R. Civ. P. . . . [F]ederal courts have traditionally entertained certain types of pre-answer motions not specifically provided for in the Federal Rules of Civil Procedure. Included among these are motions to stay proceedings pending arbitration.
Smith v. Pay-Fone Systems Inc., 627 F. Supp. 121, 122 (N.D. Ga., Atlanta Div. 1985), citing First Citizens Municipal Corp. v. Pershing Division of Donaldson, Lufkin & Jenrette Securities Corp., 546 F. Supp. 884 (N.D. Ga. 1982), and 5 C. Wright & A. Miller, Federal Practice and Procedure § 1360 (1969).
In accord with the Pay-Fone decision was Creative Tile Marketing, Inc. v. SICIS International, S.r.L., 922 F. Supp. 1534 (S.D. Fla., Miami Div. 1996). SICIS, an Italian corporation, appointed Creative Tile as its exclusive U.S. agent. When SICIS terminated the agency agreement, Creative Tile sued SICIS in Georgia state court.
SICIS removed the case to federal court and moved to compel arbitration pursuant to the arbitration provision in the parties’ agency agreement. Creative Tile moved for a default judgment on the ground that SICIS had not filed a responsive pleading as required by Fed.R.Civ.P. 12.
The court denied the motion, citing Pay-Fone, and granted SICIS’s motion to compel arbitration. Id. at 1537, fn. 1.
SECURITIES AND TORTS EXAMPLES
In an unpublished decision, the Tenth U.S. Circuit Court of Appeals affirmed a district court’s order compelling arbitration between a broker-dealer and a registered representative. The registered representative filed suit against the broker-dealer for sexual harassment and discrimination. The broker-dealer responded with a motion to compel arbitration, which the District Court granted. Dexter v. Prudential Ins. Co. of Am., No. 99-3137, 2000 U.S. App. LEXIS 12499 (10th Cir. June 7, 2000); see also Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Armijo v. Prudential Ins. Co., 72 F.3d 793, 797-798 (10th Cir. 1995); Metz v. Merrill Lynch, Pierce, Fenner and Smith, 39 F.3d 1482 (10th Cir. 1994). No other responsive pleading was filed by the defendant.
This issue has arisen in a business torts context, too. Gateway Logistics Group, a Texas company, filed suit against Dangerous Goods Management Australia Pty. Ltd., or DGM, an Australian company, and several DGM principals, in Texas state court for a number of business torts. The defendants removed on the basis of diversity and filed motions to dismiss for lack of personal jurisdiction. The court granted the motions with respect to the individual plaintiffs, who were Australia residents, but denied it as to DGM.
A joint venture agreement between Gateway and DGM contained an arbitration provision mandating that any disputes should be settled by binding arbitration in Houston.
After dismissing the individual defendants, the court issued an order that DGM “must file a responsive pleading—which may be a motion to compel arbitration in accordance with the Joint Venture Agreement—or an answer on the merits. . . .” Gateway Logistics Group Inc. v. Dangerous Goods Management Australia Pty. Ltd., Civil Action No. H-05-2742, 2006 U.S. Dist. LEXIS 34931 (S.D. Tex., Houston Div., May 31, 2006).
Back in the employment area, Broaddus v. Rivergate Acquisitions Inc., No. 3:08-0805, 2008 U.S. Dist. LEXIS 8673711 (M.D. Tenn., Nashville Div., Oct, 1, 2008), involved alleged employment discrimination and retaliation. Rivergate Acquisitions was 75% owned by a company called Greenway, which handled all its human resources.
The employee signed an employment agreement with Greenway containing an arbitration provision requiring disputes to be arbitrated under the Federal Arbitration Act. When the employee sued, the defendant responded with a motion to compel arbitration.
The employee argued that Rivergate Acquisitions was not a party to the employment agreement and had no standing to attempt to enforce it, and that the employee did not agree to arbitrate claims against Rivergate Acquisitions. Noting that “[n]onsignatories to an arbitration agreement may be bound by it,” the court stayed the case and ordered the parties to arbitrate.
A VENDOR CONTRACT
In 1 Foot 2 Foot Centre for Foot and Ankle Care P.C.v. DavLong Business Solutions LLC, 631 F. Supp. 2d 754 (E.D. Va., Norfolk Div., 2009), 1 Foot, a Virginia professional corporation, purchased a computer software system designed to manage medical office records from DavLong, a Georgia limited liability company. 1 Foot also contracted for technical support.
Both contracts contained a provision stating that “[a]ny controversy or claim arising out of or related to this Agreement or the breach thereof shall be settled by binding arbitration in Atlanta, Georgia, in accordance with the Commercial Arbitration Rules of the American Arbitration Association.”
Numerous software errors and problems occurred. 1 Foot also claimed that DavLong was not available for technical assistance. As a result, 1 Foot was forced to seek assistance from a third party at additional expense.
1 Foot filed suit against DavLong in Virginia state court. Almost two months later, DavLong removed the case to federal court based upon diversity of citizenship (see 28 U.S.C. § 1332), and simultaneously filed a motion to compel arbitration.
1 Foot moved to remand the case to state court, arguing that DavLong was in default in the state court case before its removal. 1 Foot did not allege there was not diversity of citizenship, or that the amount in controversy was beneath the federal requirement.
Noting that a defendant in default in state court is not prevented from removing to federal court when it would otherwise be proper—see Hawes v. Cart Prods. Inc., 386 F. Supp. 2d 681, 686 (D.S.C. 2005) (recognizing that a party in default in state court may remove to federal court)—the court ruled that “DavLong filed a responsive pleading contemporaneously with its notice of removal.”
The court went on to observe:
Courts have “traditionally entertained certain types of preanswer motions—such as a motion to compel arbitration” as a sufficient responsive pleading despite its absence from Federal Rule of Civil Procedure 12(b), which concerns responsive pleadings.
1 Foot 2 Foot Centre for Foot and Ankle Care P.C. v. DavLong Business Solutions LLC, 631 F. Supp. 2d 754, 756 (E.D. Va., Norfolk Div., 2009), citing Creative Tile Mktg., Inc. v. SICIS Int’l, S.r.L, 922 F. Supp. 1534, 1537 n.l (S.D. Fla., 1996), and 5C Charles Alan Wright & Arthur R. Miller, “Federal Practice and Procedure” § 1360 (recognizing that a motion to stay pending arbitration has been treated as a responsive pleading and can be brought under the scope of Fed.R.Civ.P. 12(b).
DEALING WITH A CLASS
More recently, in Jackson v. Payday Loan Store of Illinois Inc., No. 09 C 4189, 2010 U.S. Dist. LEXIS 25266 (N.D. Ill., E. Div., March 17, 2010), a group of plaintiffs filed suit against the Payday Loan Store of Illinois, alleging that certain consumer loan transactions violated the Truth in Lending Act (15 U.S.C. § 1601, et seq.), Regulation z of the Federal Reserve Board of Governors (12 C.F.R. § 226.1, et seq.), the Illinois Consumer Installment Loan Act (205 ILCS 670/1, et seq.), and the Illinois Interest Act (815 ILCS 205/0.01, et seq.). The plaintiffs had each signed an agreement in connection with the loan transactions which contained the following provision:
Any claim, dispute or controversy arising from or relating to (a) the loan made to you, (b) the actions of you, us, or third parties, or (c) the validity of this arbitration provision (“Claim”) shall, upon the election by either you or us, be resolved by binding arbitration in accordance with this arbitration provision and the Code of Procedure of the applicable arbitration organization in effect when the Claim is filed. You may select the arbitration organization from the following: either the National Arbitration Forum . . . , the American Arbitration Association . . . , or JAMS/Endispute. . . . If you do not select an arbitration organization, you agree that we may select one.
The agreement also provided that the consumer could opt out of the arbitration requirement by sending a letter to Payday within five business days rejecting the arbitration agreement. The agreement also specifically barred arbitrating the claims on a class basis. The plaintiffs agreed that they had not opted out of the arbitration provision.
The court noted that the National Arbitration Forum was barred from arbitrating any claims based on consumer loans pursuant to a 2009 agreement to leave the business with the State of Minnesota. According to the plaintiffs, it was unclear whether the American Arbitration Association would agree to handle the arbitration because of an AAA moratorium on accepting new arbitrations where “the company is the filing party,” because the arbitration in the case was demanded by Payday Loans.
The court rejected that position as a misreading of the AAA moratorium language, noting that “[i]f the Court rules that the Agreement is enforceable and that arbitration is therefore mandated, such arbitration will not occur automatically at Payday Loan’s behest, but will only begin if Plaintiffs file a claim in arbitration.” Id., slip op. at 6.
The Plaintiffs also raised questions about whether the remaining named arbitral organization, JAMS, would agree to handle the arbitration. The court pointed out that Federal Arbitration Act Section 5 (9 U.S.C. § 5) provides that “ . . . if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire. . . .”
The court granted the motion to compel arbitration:
Plaintiffs have not shown that arbitration is impossible under the Agreement, because they have not proven that both the AAA and JAMS will refuse to administer the arbitration of their claims, nor have they shown that the choice of a specific arbitrator was so central to the Agreement that a substitute arbitrator could not be named. Plaintiffs must therefore submit their individual claims to arbitration. The Agreement’s class action waiver is enforceable and not unconscionable. . . .
Id., slip op. at 13.
* * *
Federal courts seem to accept the proposition that the filing of a motion to compel arbitration by a defendant is a responsive pleading that obviates the necessity of filing an answer notwithstanding Fed.R.Civ.P. 12.
That is particularly sensible for several reasons. If the contract containing the arbitration provision is commercial, the matter will in all likelihood be referred to arbitration and any responses or affirmative defenses will be the province of the arbitral tribunal to resolve. If the motion to compel arbitration is denied, then the defendant can answer and plead any defenses.
The author is a member of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo (www.mintz.com). He divides his practice between the firm’s San Diego and New York offices and is licensed to practice law in California, New York and the District of Columbia. He is a member of the American Board of Trial Advocates and a Fellow of the Chartered Institute of Arbitrators.
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