Is Arbitration Arbitrable? Court of Appeals Weighs in on the Enforceability of Contract Arbitration Clauses

In Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates, LLC, the Wisconsin Court of Appeals decided the issue of who has authority to determine whether a contract’s arbitration clause is enforceable where a subsequent contract may negate and supersede that clause.  Is this question reserved for the courts, or will an arbitrator make the determination?  In other words, is arbitration arbitrable?

The Dispute

Midwest Neurosciences Associates, LLC (“Midwest”) consisted of a group of medical practitioners, one of whom was Great Lakes Neurosurgical Associates, LLC (“Great Lakes”).  The members of Midwest entered into an operating agreement (the “Operating Agreement”) whereby they agreed to arbitrate all disputes relating to the terms and conditions of the Operating Agreement.  Notably, the Operating Agreement provided that any such arbitration proceedings would be governed by the JAMS’ Arbitration Rules, which rules were incorporated into the Operating Agreement.  One of those rules provides that the jurisdiction and arbitrability of any dispute concerning the existence and interpretation of the agreement which mandates arbitration shall be decided by the designated JAMS arbitrator.

We now fast forward ten years, to when a dispute arose concerning Great Lakes’ alleged violation of the Operating Agreement’s non-competition clause (the “Dispute”).  Midwest filed a motion to compel arbitration of the Dispute, and argued that it should be resolved in arbitration, as required by the terms of the Operating Agreement.  However, Great Lakes responded that the terms of a subsequent agreement (the “Subsequent Agreement”) entered into by the parties superseded the Operating Agreement.  Because the Subsequent Agreement superseded the Operating Agreement, and did not contain an arbitration clause, Great Lakes argued that the Dispute belonged in civil court.  Thus, the enigmatic question before the court was whether the court itself should decide whether the Dispute should be arbitrated, or whether the designated arbitrator should decide whether the Dispute should be arbitrated.

The Court’s Analysis

The court generally deferred to principles of contract construction.  When parties contractually agree to arbitrate disputes arising from that contract, the court is going to hold those parties to it.  The court further acknowledged that the parties may even agree to arbitrate whether to arbitrate.

The court’s analysis was a constrained one, and focused solely on whether the parties agreed to submit a dispute arising out of the Operating Agreement to arbitration; it declined to assess the merits of any substantive claims of the parties.  In other words, the court reasoned if the arbitration clause addresses the dispute at issue, and that dispute is not otherwise excluded from arbitration under that agreement, that dispute should be arbitrated and not litigated in the courts.  To address Great Lakes’ argument that the Subsequent Agreement superseded the arbitration clause, in turn requiring the Dispute to be decided in civil court, would be to rule on the underlying substantive claims.  Ultimately, the court decided that the determination of whether to arbitrate the Dispute should be settled in arbitration.

The Take-Aways

This case imparts some valuable lessons.  First, parties to agreements which incorporate mandatory and binding arbitration clauses are well-advised to carefully review and negotiate these provisions. Think about what types of disputes might arise out of the agreement, and how you would like these disputes to be handled.  Consider including exceptions for certain types of claims to the arbitration provision.  Further, it is essential to understand the forum in which such disputes will be arbitrated and the rules used by that forum, particularly when the agreement in question incorporates those rules.

Second, and perhaps more discomforting, is the implicit restriction the court placed on one’s freedom to contract and the degree to which parties’ intentions govern a contract.  A fundamental principle of contract law is in the event of ambiguity in a contract, the parties’ intents control the meaning of the contract.  Here, the Subsequent Agreement contained a ‘merger clause’ which essentially stated that the Subsequent Agreement governed the relationship between the parties, and that the Subsequent Agreement superseded any previous agreements entered into between the parties, which arguably included the Operating Agreement.  The final ruling of the court thus brings into question whether the parties’ intent in including the merger clause in the Subsequent Agreement actually had any effect; the parties remained bound by the arbitration clause in the Operating Agreement.  For this reason, it is imperative to not only review the terms of related agreements and how they correlate with one another, but to also have a comprehensive understanding of how courts might determine which conflicting terms prevail over one another and under what circumstances.  Otherwise, one may find themselves without a solid grasp of their contractual rights and responsibilities.

If you have questions about your own agreements and how they may be affected, contact Axley’s business attorneys about contract negotiation and drafting.