Third Circuit Clarifies Standards for Arbitration Motions

by Ballard Spahr LLP
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Resolving an issue "of utmost importance" that has divided the district courts, the Third Circuit yesterday clarified the legal standards that district courts should apply in deciding a motion to compel arbitration.

In Guidotti v. Legal Helpers Debt Resolution, L.L.C., the court identified the circumstances under which district courts should apply the standard for a motion to dismiss, as provided by Fed. R. Civ. P. 12(b)(6), and those under which they should apply the summary judgment standard found in Fed. R. Civ. P. 56. It also addressed the role that discovery plays in the application of these standards.

Section 4 of the Federal Arbitration Act (FAA) authorizes courts to enforce a written arbitration agreement if they are "satisfied that the making of the agreement … is not in issue" before ordering arbitration. The district court in Guidotti denied a motion to compel arbitration filed by two of the defendants after determining that the plaintiff had not received the account agreement containing the arbitration provision. The court did not require or permit discovery on that issue because it concluded that the existing documentary record was sufficient. The Third Circuit reversed, holding that the district court should have allowed limited discovery on the issue of arbitrability and then applied a summary judgment standard in deciding the arbitration motion.

According to the Third Circuit, when it is apparent, based on the face of the complaint and documents relied on in the complaint, that a party's claims are subject to an enforceable arbitration agreement, a motion to compel arbitration should be decided under a Rule 12(b)(6) standard without discovery. However, if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has proffered facts sufficient to place the agreement to arbitrate in issue, then discovery on the issue of arbitrability should be permitted and the motion to compel arbitration should be decided under the Rule 56 summary judgment standard.

Guidotti is particularly important to credit card issuers, banks, and other businesses that reserve the right to change the terms of their consumer agreements or that permit their customers to conduct business online. Consumers sometimes contend that they did not agree to arbitrate because they never received the amendment to the agreement that added an arbitration provision or that changed an existing provision, or because the arbitration provision was not provided or was not easily accessible to them until after they electronically entered into the contract.

The Third Circuit's ruling increases the likelihood that plaintiffs opposing a motion to compel arbitration will seek discovery in an attempt to show that there was never a meeting of the minds regarding arbitration. While acknowledging that the FAA places considerable emphasis on efficient and speedy dispute resolution, the court concluded that "speed is not the sole or even the dominant goal of the FAA" since "enforcement of private agreements [to arbitrate]" is another important aim of the statute.

We have enforced hundreds of arbitration agreements for our clients and routinely deal with requests for discovery by plaintiffs' lawyers. In most cases, the documentary record we establish is itself sufficient to support enforcement of the arbitration provision without the need for discovery. But we are also experienced in handling all aspects of discovery on arbitrability issues if a court requires such discovery before ruling on our client's arbitration motion.

Ballard Spahr's Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. The CFS Group also produces CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe to the blog, use the link provided to the right.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

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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