Arbitration Process Issues

In a case presenting a messy set of facts, a federal district court ordered the arbitration of certain claims, allowed litigation to proceed as to other claims, but ordered a stay of the litigation pending the outcome of the arbitration. The defendants acquired certain intellectual property rights from the plaintiff inventors. The parties’ acquisition agreement addressed potential litigation, but not arbitration. However, attached to the acquisition agreement as exhibits were eleven separately executed ancillary agreements, including a consulting agreement and net sales agreement which did contain arbitration agreements. The consulting agreement governed the parties’ rights and obligations with respect to one of the plaintiff’s post-closing consulting services for one of the defendants. The net sales agreement governed the parties’ rights and obligations with respect to specific post-closing sales. Three other agreements which referenced the acquisition agreement, but which were not incorporated into the acquisition agreement, were also relevant: an operating agreement, trust agreement and subscription agreement. Of these, only the operating agreement contained an arbitration clause; that agreement governed the parties’ rights with respect to defendants’ business operations and internal governance.

The defendants paid the plaintiffs $2 million at closing, and agreed to pay additional consideration in connection with the acquisition. However, before the additional consideration was tendered, the defendants filed an arbitration principally alleging that the plaintiffs breached at closing by misrepresenting inventorship and ownership of the subject products. That same day, the plaintiffs filed a lawsuit in federal district court principally alleging that the defendants breached at closing by not transferring the closing documents to a trustee as required in the trust agreement and acquisition agreement. The defendants moved to stay the litigation and to compel arbitration. After initially determining that there were valid arbitration agreements, the court turned to the question of the agreements’ scope. The defendants argued that the plaintiffs should not be allowed to pursue litigation on selective portions of the acquisition dispute to avoid the inventorship/ownership issue. The court disagreed, finding that the plaintiffs did not agree to arbitrate all claims simply because three ancillary agreements contained arbitration provisions. The acquisition agreement contemplated litigation alone on disputes relating the plaintiffs’ claims. The court did conclude, however, that the defendants’ claims for breach of the consulting agreement, net sales agreement and operating agreement were arbitrable. This limited conclusion was not disputed by the plaintiffs. The court, exercising its discretion, also ordered a stay of the arbitration pending resolution of the inventorship/ownership issue because certain aspects of the plaintiffs’ nonarbitrable claims could have a preclusive effect on resolution of the arbitrable claims. Brennan v. Global Safety Labs, Inc., Case No. 07 CV 546 (USDC N.D. Okla. May 29, 2008).

This post written by Brian Perryman.

The Eleventh Circuit has held that for the purposes of the Federal Arbitration Act (“FAA”), mediation is not arbitration. Specifically, the court held that a party cannot use § 3 of the FAA to enforce a contract clause requiring an aggrieved party, prior to filing a lawsuit, to institute mediation or non-binding arbitration. The court noted that while the FAA does not define “arbitration”, classic arbitration is characterized by submitting a dispute to a third party for a binding decision. Furthermore, the court said, the “FAA clearly presumes that arbitration will result in an ‘award’ declaring the rights and duties of the parties.” Thus, a dispute resolution procedure that does not result in an award is not arbitration “within the scope of the FAA.”

While some in the ADR circuit may believe this decision represents a clear understanding of the differences between arbitration and mediation, others may feel the court unnecessarily denigrated the mediation process by implying that it is little more than a speed bump on the way to the courthouse. Advanced Bodycare Solutions, LLC v. Thione International, Inc., No. 07-12309 (11th Cir. Apr. 21, 2008).

This post written by Lynn Hawkins.

The Texas Supreme Court has held that a party waived its right to arbitrate by vigorously, and successfully, opposing a demand for arbitration, taking substantial discovery on virtually every issue in the case and taking a dispute to the eve of trial before reversing course and demanding arbitration. The court's opinion reverses the decision of the lower courts, which had allowed the change in tactics. The court found that a showing of prejudice was required to support a finding that the right to arbitration had been waived, and found that prejudice was present due to the unfairness of the change of position, and the delay, expense and damage to the opponent's legal position. The court was bothered by the fact that the process had been manipulated to gain an unfair tactical advantage. The facts were so extreme here, that the court found that to deny the proposition that the right to arbitrate had been waived would amount to a holding that a party could never waive its right to arbitrate through participating in a lawsuit in lieu of arbitration. Homes v. Cull, No. 05-882 (Tex. May 2, 2008).

This post written by Rollie Goss.