I want to close out the month by discussing two decisions from the Supreme Court of Appeals that address the scope of the trial court’s review of an arbitration agreement. Tomorrow I’ll write about two new decisions from the United States Supreme Court that also deal with arbitration.
In State ex rel TD Ameritrade, Inc. v. Kaufman, 692 S.E.2d 293 (W. Va. 2010), TD Ameritrade claimed that Dan Salamie was required to arbitrate his claim that Ameritrade was vicariously liable for losses Salamie sustained when his broker, Bruce Conrad, disregarded his instructions regarding various investments. Ameritrade moved to compel arbitration and to dismiss Salamie’s lawsuit and/or to stay the litigation pending the outcome of arbitration.
Salamie did not oppose arbitration so long as Ameritrade stipulated that Conrad was within its "control," as defined by federal securities law, so that Salamie could establish that Ameritrade was vicariously liable for Conrad’s actions. Ameritrade refused the stipulation, so Salamie responded to Ameritrade’s motion to compel and moved for partial summary judgment on whether Conrad was a "controlled person."
The circuit court granted Ameritrade’s motion to compel arbitration, but also granted Salamie’s motion for partial summary judgment, and made findings of fact and conclusions of law regarding Conrad’s status, and ordered the arbitrator to adopt those findings and conclusions. Ameritrade sought a writ of prohibition against the circuit court’s ruling on the grounds that the court exceeded its authority by ruling on the merits of the dispute even though it had compelled arbitration.
Ameritrade argued that the circuit court was limited to deciding whether the underlying dispute was subject to arbitration and could not address the merits of the dispute. Unlike most cases involving arbitration, where the parties are fighting over whether arbitration is required or whether the Federal Arbitration Act is applicable, the parties’ disagreement here was "whether the trial court had the authority to address any matters in addition to the threshold issue of arbitrability."
In a unanimous opinion written by Justice Thomas McHugh, the Court agreed with Ameritrade’s position and rejected Salamie’s reliance on the severability doctrine, which provides that a trial court can address a challenge to an arbitration clause, but that only an arbitrator can consider a challenge to the contract as a whole:
Seeking to forestall an arbitral ruling that the contracts executed between Mr. Salamie and TD Waterhouse were not binding on successor Ameritrade and also seeking to prevent the arbitrator from concluding that Mr. Conrad was not a "controlled person" under federal law, Mr. Salamie persuaded the trial court to rule on issues that involve the merits of the underlying dispute. This foray into matters reserved for arbitral resolution was clearly improper. When a trial court is required to rule upon a motion to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1-307 (2006), the authority of the trial court is limited to determining the threshold issues of (1) whether a valid arbitration agreement exists between the parties; and (2) whether the claims averred by the plaintiff fall within the substantive scope of that arbitration agreement.
The excerpt in bold represents new syllabus point part 2 of the opinion.
Finally, the Court also found that the circuit court erred in ruling on Salamie’s motion for partial summary judgment, as the ruling was improper under the severability doctrine, and also because "unresolved factual issues" combined with the lack of discovery made the ruling improper.
In the other decision, Ruckdeschel v. Falcon Drilling Co., L.L.C., 2010 WL 1641223 (W. Va. April 23, 2010), the Court considered an appeal from the Circuit Court of Tyler County stemming from a wrongful death action.
The plaintiffs filed suit against Falcon Drilling Co., LLC, Texas Keystone, Inc., and Halliburton Energy Services, Inc. for Thomas G. Miller, Jr.’s death as a result of an explosion and fire at an oil well site. Falcon Drilling was Miller’s employer and the driller on the site. Texas Keystone owned the well site and had hired Halliburton to perform certain functions regarding the well’s operation.
Long story short, Halliburton settled with the plaintiffs after it asserted cross-claims against Falcon Drilling for implied indemnification and common-law contribution and against Texas Keystone for contractual indemnification and contribution. The work order (contract) between Texas Keystone and Halliburton, which provided that Texas Keystone would indemnify and hold Halliburton harmless and that "any dispute that may arise out of the performance of this Contract shall be resolved by binding Arbitration," was actually signed by a representative of Falcon Drilling, rather than a representative of Texas Keystone.
Texas Keystone moved to dismiss the cross-claim because the contract was not enforceable, as its representative had not signed it, and also because whether the indemnification provision was enforceable had to be arbitrated, as provided by the contract.
The circuit court felt that the contract was valid, but that additional discovery was needed in order to determine whether the contract "constituted a binding agreement between Texas and Halliburton." The court also determined that Falcon Drilling was not a necessary party to an arbitration, as its employee who signed the Texas Keystone contract would be involved in the arbitration only as a witness.
If I haven’t lost you this far, the Supreme Court, in a unanimous opinion written by Justice Margaret Workman, identified the issue on appeal as "whether the circuit court erred in determining that the indemnification question should be arbitrated according to the arbitration provision in the work order[,]" and noted that the "fundamental problem with the circuit court’s decision stems from the absence of a clear ruling by the circuit court as to whether the work order constitutes a valid, binding contract between the parties."
Thus, the circuit court "placed the proverbial cart before the horse" in determining that the contract was valid, even as the court acknowledged that discovery was needed on whether the contract was a valid agreement between Texas Keystone and Halliburton: "The circuit court must determine, or allow a jury to determine, whether the work order constitutes a valid contract between the parties before it can decide whether the indemnification claim falls within the scope of the arbitration provisions."
The Court held that the circuit court erred in dismissing the cross-claim based on its determination that the contract was valid.
The other issue before the Court was Halliburton’s argument that the arbitration provision did not apply to its claim for contractual indemnification because Miller’s wrongful-death claim was not a dispute arising out of the performance of the contract. This issue was one of (more or less ) first impression:
This Court has never precisely addressed the issue of whether the arbitrator or the circuit court resolves the issue of whether a particular claim is arbitrable outside the context of the Federal Arbitration Act, 9 U.S.C. §§ 1-307 (2006). In this case, the circuit court ultimately found that the claim of indemnification was subject to arbitration; but, this determination was devoid of any discussion of the circuit court’s resolution of this particular issue.
The Court relied on its holding in State ex rel TD Ameritrade v. Kaufman (discussed above) that a circuit court’s authority is limited to determining whether a valid arbitration agreement exists and whether the plaintiff’s claims fall within the scope of the agreement.
"In an effort to bring uniformity to our arbitration law," the Court extended its holding in Ameritrade "to all actions involving arbitration agreements[,]" which produced the following new syllabus point:
To this end, the Court holds that when a circuit court is presented with the issue of whether an arbitration agreement is applicable, the court must determine the threshold issues of (1) whether a valid arbitration agreement exists between the parties; and (2) whether the claims averred fall within the substantive scope of that arbitration agreement.
On remand, in addition to determining whether a valid contract existed between Halliburton and Texas Keystone, the Court directed the circuit court to determine, assuming a contract did exist, whether Halliburton’s claim for indemnification was subject to the contract’s arbitration provision.
The opinion also discussed whether Halliburton’s claims for contribution and implied indemnification still existed, but I will omit that discussion from this post.
The import of these decisions is that while the trial court’s authority is limited to determining the two threshold issues identified above, the Supreme Court has affirmed that the trial court and not the arbitrator will determine whether a particular claim is subject to arbitration.