The Relationship Is Governed By Multiple Agreements And Not All Require Arbitration; Must You Arbitrate?

http://arbitrationnation.com/wp-content/uploads/2013/05/UmbrellaOfFlowers-190x178.jpgIn the past few months, two federal appellate courts have had to determine whether parties were bound to arbitrate claims that arose from relationships governed by multiple agreements, only some of which called for arbitration.  While the courts reached different conclusions based on the facts, they both relied on the same critical inquiry: did the agreement containing arbitration create the essential relationship between the parties and would the claims necessarily refer to that agreement?  If so, the claims are arbitrable.

In Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O’Quinn & Assocs., No. 12-2915, 2013 WL 1707897 (2d Cir. Apr. 22, 2013), law firms were fighting about whether the Robinson firm was owed money under a joint representation relationship.  Three documents governed their relationship: a “Client Agreement” setting forth the contingency fee rate, defining the clients, and requiring arbitration; a Joint Responsibility Referral Fee Letter Agreement setting forth how the law firms would share attorneys’ fees, without an arbitration agreement; and a Client Consent document that told the clients about the law firms’ joint representation and the fact they were splitting fees.

Robinson started an action in federal court to recover fees, and the defendants successfully moved for dismissal based on its argument that the claims must be arbitrated.  The Second Circuit affirmed.  It found that the Client Agreement was “the foundation of these interdependent documents,” because without an attorney-client relationship there could be no basis for sharing attorneys’ fees.  Robinson argued its claims arose only out of the Joint Letter Agreement, but the court concluded no claims could arise solely from that agreement between the law firms, since it did not “contain an independent means of generating the pool of funds from which those fees would be paid.” Therefore, even though Robinson was not a party to the Client Agreement, the court held it was bound by the arbitration agreement in that document by the doctrine of equitable estoppel.

The Sixth Circuit had recently reached the opposite result by applying similar rationale.  In Dental Associates v. American Dental Partners of Mich., No. 12-1008, 2013 WL 1272086 (6th Cir. March 28, 2013), a group of dentists brought suit for breach of contract and tortious interference against a service provider that had purchased most of their assets.  The defendant, ADPM, had executed two agreements with the plaintiff: an Asset Purchase Agreement (through which its parent company bought many of the plaintiff’s assets) that contained an arbitration agreement; and a Service Agreement detailing the administrative services ADPM would provide to the plaintiff, which lacked an arbitration agreement.  The Service Agreement also required the plaintiff to execute employment agreements with three dentists – those Employment Agreements all called for arbitration of disputes.

The defendant in this case was unsuccessful in dismissing the plaintiff’s claims and compelling arbitration in the district court, and the Sixth Circuit affirmed.  The appellate court stated the relevant rule as: “Where there are multiple contracts between the parties, a dispute is arbitrable pursuant to the arbitration clause in a related contract if ‘the arbitration clause is part of the umbrella agreement governing the parties’ overall relationship.’”  However, even if the umbrella agreement has an arbitration provision, claims can be heard in court if the action can be maintained “without reference” to the umbrella agreement.  In this case, the court concluded that the APA was not an umbrella agreement, because it did not “create the relationship between the parties” and instead governed the “one-time purchase and transfer of assets,” while the Service Agreement defined the ongoing business relationship.  The court also found that the plaintiffs’ claims could be maintained without reference to the APA.

The lesson of these cases for drafters is clear: make sure that any time multiple agreements will function interdependently, their arbitration clauses mirror each other (unless the parties intentionally want some claims to go to court, in which case that should be made explicit).  For litigators, the lesson is that when multiple agreements are at issue, you need to find an argument that the agreement whose arbitration clause (or lack thereof) you prefer is the “foundational” or “umbrella” agreement.

Topics:  Arbitration, Attorney's Fees, Breach of Contract

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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