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.
(Emphasis added).
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.
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