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Perspectives: Appeals address atypical arbitration actions

By Marshall H. Tanick

“[A]rbitrators are the final judges of both law and fact.”

—City of Richfield v. LELS, 923 N.W.2d 36, 40 (Minn. 2019)

Alternative dispute resolution (ADR), including the species of arbitration, is being used with growing frequency. Its usage probably increased and will continue to do so due to COVID-19 and the remnants of the pandemic, which pushed back cases and clogged the dockets of the courts more than usual.

Consequently, parties are tending to use more arbitration clauses and invoking them when legal disputes arise. But having an arbitration clause in an agreement does not necessarily mean that a dispute will be resolved in that manner.

A pair of rulings this summer by the federal and state appellate courts in Minnesota in atypical arbitration disputes reflects uncertainty surrounding the enforcement of these ADR clauses. In one case, the 8th U.S. Circuit Court of Appeals compelled arbitration while, in the other, the Minnesota Supreme Court upheld a lower court ruling, determining that the matter was not subject to arbitration.

Diversity decision

The 8th Circuit, in a diversity jurisdiction case, held that guarantors of indemnification obligations of a company that had been sold were compelled to arbitrate whether the claims against them had been released and discharged in a settlement agreement in Sommerfeld v. Adesta, LLC, 2 F.4th 758 (8th Cir. June 24, 2021).

The case, which started in Nebraska state court, was removed to federal court because of diversity of citizenship. The dispute involved guarantors of various indemnity obligations of a company that had been sold. Following the sale, the guarantors, who were executives and prime shareholders of the company, continuing to work for the new company, but then started a competing venture, which prompted a lawsuit regarding breach of noncompete clauses and misappropriation of trade secrets. But that litigation did not relate to the prior indemnity obligations that were contained in the buy-sell agreement for work performed by the company in a pending project.

The parties entered into a settlement agreement with releases of their claims in the employment dispute, but the settlement documentation did not reference the prior indemnification obligations. When claims arose on that prior project for faulty work the new company invoked an arbitration clause with the guarantors regarding their obligations for indemnification under the buy-sell agreement.

However, the indemnitors claimed that that clause was no longer in effect because of the releases in the subsequent employment-related matter. The federal district court, following removal, ruled in favor of the company and compelled arbitration. The 8th Circuit affirmed, rejecting the claim by the guarantors that their indemnification obligations were wiped out by the settlement agreement and release that resolved the post-purchase transaction employment dispute.

The “gateway” issue was whether a “valid agreement to arbitrate exists.” The settlement agreement released claims alleged in the post transition dispute that were “different than an abrogation of contractual terms.”  The underlying indemnification issue, which was part of the buy-sell agreement, is “not a matter that was addressed” in the settlement of the employment disputes, and the settlement agreement “does not mention,” let alone terminate, the prior purchase agreement, which contained the standard arbitration clauses. Additionally, the settlement agreement does not reference the indemnification issue, which demonstrates that “there is simply no abrogation” of the arbitration provisions.

Because the guaranty indemnification obligations “fell entirely outside the scope” of the parties’ settlement agreement, they have not been released by the settlement agreement which “simply does not cover other claims or subject matters.” Therefore, the trial court correctly compelled arbitration and “did not abuse its discretion” to dismiss the action, rather than stay it, until the case was resolved by arbitration. Therefore, the lower court ruling properly ordered arbitration under the Federal Arbitration Act, 9 U.S.C. §1, and refusing to stay the lawsuit pending resolution of the arbitration.

PERSPECTIVE POINTERS

Grounds to vacate arbitration award under Uniform Arbitration Act, Minn. Stat. § 7

  • Corruption fraud or other undue means.
  • Evident partiality by arbitrators.
  • Arbitral misconduct.
  • Refusal by arbitrator to postpone hearing when warranted.
  • Arbitrator exceeded power.
  • No agreement to arbitrate.

‘Correct’ conclusion

But arbitration was not required in a mineral lease dispute on the Iron Range in Glacier Park Iron Ore Properties v. United States Steel Corp.961 N.W.2d 766 (Minn. June 30, 2021). The lessor claimed that the lessee had aided and abetted breach of fiduciary duties and sought arbitration under the mineral lease between the parties, which contained an arbitration agreement. The St. Louis County District Court, after first holding that it had the authority to decide whether the matter was arbitrable determined that it was not.

The Court of Appeals affirmed, reasoning that the determination of arbitrability is to be made by the trial court, rather than an arbitrator, and agreed with the lower court that the claim was not subject to arbitration, because the fact that the lessor could have stopped performing obligations and waited to be sued for breach of contract did not make the breach of fiduciary claim subject to arbitration. The revised Minnesota Uniform Arbitration Act, Minn. Stat. § 572B.01, et seq., supersedes prior case law that a determination whether an arbitrator or a district trial court resolves issues of arbitrability and, under it, that decision rests with the judge, an interpretation that is congruent with the process under the Federal Arbitration Act, 940 N.W.2d 686 (July 27, 2020).

Meanwhile, additional disputes arose between the parties, including nuisance and trespass claims against the surface owner of the land, which the parties litigated through a separate non-arbitral proceeding, with nuisance and trespass claims surviving a dismissal motion. Glacier Park Iron Ore Properties v. United States Steel Corp.2021 WL 416695 (Minn. Ct. App. Feb. 8, 2021)(unpublished) rev. den’d. (Minn, April 20, 2021).

While the Supreme Court refused to intervene in that case, it did take up the prior arbitration dispute, affirming the appellate court’s decision upholding the trial court’s determination that it was entitled to decide arbitrability and its ruling that the matter did not fall within the arbitration provision of the agreement upon de novo review. In a decision written by Chief Justice Lori Gildea, the court held that the trial court properly considered whether the dispute was subject to arbitration and “correctly concluded” that it was not. The trial court is vested with that authority unless there is “clear and unmistakable evidence” indicating that the parties intended to have that issue of arbitrability decided by an arbiter; if not, it is the court, and not the arbitrator, who is to decide whether a dispute is subject to arbitration under both state and federal laws.

In this case, the contract did not meet the standard because it did not provide “clear and unmistakable” language that the parties intended to delegate arbitrability to an arbitrator. Therefore, the trial court was the proper vehicle for deciding the issue of arbitrability, and the trial court correctly decided that the matter was outside the scope of the arbitration clause, which did not extend to the breach of fiduciary duty claim. This was because none of the various clauses comprising the arbitration agreement “covers a tort claim” but is rather restricted “mining” practices and “determination of royalty’s payable,” but not broader tort claims asserted in the litigation.

The U. S. Supreme Court is stepping into the arbitral fray. In Badgerow v. Walters, No. 20-1143, the justices are to hear during their upcoming 2021-22 term a challenge to the jurisdiction of federal courts to adjudicate appeals of arbitration awards under the Federal Act, 9 U. S. C. sections 9-10, when the underlying juridical basis rests solely on the existence of a federal question, an esoteric issue that will be of interest to ADR groupies, among others.

Meanwhile, the duo of federal and state cases here this summer shows that, while often preferred by parties before a dispute develops, this form of ADR process will not always be upheld by the court when a challenge to arbitrability arises.

Marshall H. Tanick is an attorney with the Twin Cities law firm of Meyer Njus Tanick.