Third Circuit Sets Ground Rules for Compelling Arbitration

During a contract dispute, the parties often disagree about whether the terms of the agreement require them to arbitrate. Not surprisingly, many of these disagreements end up in court.

The Third Circuit Court of Appeals recently clarified the standard for deciding motions to compel arbitration. It specifically articulated the circumstances under which district courts should apply the standard for a motion to dismiss and those under which they should apply the summary judgment standard.

As noted by the Third Circuit, the question is important because the two standards differ in several important ways. The test for reviewing a motion to dismiss for failure to state a claim under Rule 12(b)(6) is whether, under any “plausible” reading of the pleadings, the plaintiff would be entitled to relief. The court generally only considers the complaint and any exhibits attached when making its decision. In contrast, a “court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Summary judgment motions are supported by affidavits, depositions, interrogatory answers and other discovery.

In reaching its decision in Guidotti v. Legal Helpers Debt Resolution, the Third Circuit concluded that each standard has its merits. Determining the appropriate one to apply is based on the specific facts of the case.

As explained in the opinion:

When it is apparent, based on “the face of a complaint, and documents relied upon in the complaint,” that certain of a party’s claims “are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery’s delay.”

But if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue, then “the parties should be entitled to discovery on the question of arbitrability before a court entertains further briefing on [the] question.”

While the Third Circuit’s decision is intended to provide clarity to the district courts, it also provides businesses with much-needed guidance about the burden of proof that will be required when seeking to compel arbitration. It also makes clear when parties to a contract will have the opportunity to provide additional evidence regarding the enforceability of an arbitration provision.

If a business wishes to require arbitration to resolve contractual disputes the contractual language should be clear and unambiguous.  In addition, it would be prudent to clearly identify the person who or the entity that will conduct the arbitration as well as the location of the arbitration.  We have seen arbitration clauses that require arbitration at a location inconvenient to our client.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Robert Levy, or the Scarinci Hollenbeck attorney with whom you work.