When A Third Party (And Non-Party) Can Enforce An Arbitration Provision

arbitrationThe Northern District compelled arbitration of a multi-count fraud suit filed by a software company against a former salesman and his new employer in Paragon Micro, Inc. v. Bundy, 2014 WL 2441969 (N.D.Ill. 2014).

The ex-employee formed his own company and started steering business from his former employer.  The former employer sued for computer tampering, breach of fiduciary duty, unfair competition, and conversion.

The Independent Contractor Agreement signed by the defendant salesman said “any and all disputes” would be resolved by binding arbitration.  After the plaintiff refused defendants’ demand for arbitration, the defendants moved to compel arbitration.

Result: motion granted.

Reasons:

The Federal Arbitration Act, 9 U.S.C. § 1 (FAA), reflects a liberal policy favoring arbitration agreements;

– Courts should enforce arbitration clauses unless they are tainted by fraud, duress, unconscionability or other standard contract defenses;

– The FAA permits a court to compel arbitration where there is (1) a written agreement to arbitrate; (2) a dispute covered by or within the scope of an arbitration agreement; and (3) a refusal to arbitrate;

– Federal courts rely on state contract formation rules in deciding whether parties agreed to arbitrate a particular issue and a party can be compelled to arbitrate only those issues he agreed to arbitrate;

– The party opposing arbitration agreement bears the burden of showing why the agreement is unenforceable;

– Any doubts concerning arbitration, should be resolved in favor of it;

– Contractual arbitration provisions survive termination of the contract unless the contract expressly states otherwise;

–   “arising out of”, “relating to” and “any and all” phrasing leads to a strong presumption of arbitrability.

(**3-5, 8).

Application:

The Court held that the contract’s arbitration clause applied to the plaintiff’s various claims against the defendants.  Finding that plaintiff’s Complaint allegations fell within the scope of the arbitration clause, the Court pointed to the arbitration clause’s applicability to “any and all disputes” connected to the individual defendant’s account representative duties.

The Court also found that the corporate defendant – a non-party to the Independent Contractor Agreement – could still enforce the arbitration clause against the plaintiff.

Under Illinois law, a non-party can require arbitration where (1) the plaintiff lodges claims against the non-party that reference a written agreement (that has an arbitration clause); and (2) when the plaintiff’s claims against the third party are factually intertwined with the claims against another party that did sign the contract.

Here, both non-party exceptions applied.  The plaintiff’s claims referred to a written agreement – the Independent Contractor Agreement –  and the allegations directed to the corporate defendant (non-party) were enmeshed with the plaintiff’s claims against the individual defendant (the account rep).

Finally, the court nixed the plaintiff’s waiver argument.  The Court cited case law that suggests that at least a several-month delay – from suit filing to the arbitration demand – is usually required for a party to waive an arbitration provision. (*10).

Afterwords:

This case illustrates that contractual arbitration clauses will be upheld where they are broad and clearly worded.  The presence of “any and all disputes” or “arising out of” verbiage will likely signal all-encompassing arbitration coverage. 

Non-parties can enforce an arbitration clause where they’re third-party beneficiaries of the contract or where the claims against the third party are factually connected to claims against a party that did agree to arbitration.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.