Carefully Craft Your Arbitration Clause if You Want Some, But Not All, Disputes Arbitrated

As I discussed in Is Arbitration Quicker, Cheaper and Better for You?, sometimes it is in a party’s interest to have a dispute resolution mechanism that is long, onerous and expensive.  Further, as the recent case Grand Wireless v. Verizon Wireless confirms, if you want some disputes resolved by arbitration and others resolved by a court, it is critical that your arbitration clause spell this out in detail.

In 2002, Grand Wireless entered into an Agency Agreement with Verizon Wireless to be the latter’s exclusive sales agent within a defined territory.  As part of this arrangement, Grand set up various retail outlet stores within the territory.  In 2011, Verizon exercised its right to terminate the Agency Agreement, and Grand began looking for a new business partner that could stock its stores with products.  Before the actual termination date arrived, however, a Verizon employee, Erin McCahill, sent out mailings to Grand’s customers falsely informing them that Grand’s stores had closed and providing the address of the nearest Verizon location.  Not surprisingly, Grand sued Verizon and McCahill, alleging that they had violated the federal RICO statute, committed deceptive and unfair acts and practices in violation of Massachusetts General Law Chapter 93A, and committed various common law torts.

Verizon and McCahill responded by moving to compel Grand to arbitrate all of these claims based on the arbitration provision in the Agency Agreement, which stated: “Any controversy or claim arising out of or relating to this Agreement … between the parties, shall be settled by arbitration ….”  Grand opposed arbitration, stating that the claims fell outside the scope of the arbitration clause, and specifically argued that the language in the arbitration clause “arising out of or relating to this agreement … unambiguously limit[ed] the scope of the arbitrable claims to those which depend for resolution on interpreting or applying some provision of the Agency Agreement.”

The District Court agreed with Grand and denied the Motion to Compel, but Verizon appealed.  In analyzing the issue, the First Circuit noted that, in order to enforce a contractual arbitration provision, the defendants had to demonstrate that:

  • A valid agreement to arbitrate exists.
  • They were entitled to invoke the arbitration clause.
  • The plaintiff was bound by that clause.
  • The claim asserted came within the clause’s scope.

The Court also stated that:

An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.  Doubts should be resolved in favor of coverage. … Thus, where the language of an arbitration clause is broad and in the absence of any express provisions excluding a particular grievance from arbitration, we think only the most forceful evidence of a purpose to exclude the claim from arbitrating can prevail.

The First Circuit then took a very literal approach when juxtaposing this rule with Grand’s argument that none of its statutory or common law claims arose out of or related to the Agency Agreement:

Grand’s claims may well require resort to the Agreement.  [Therefore, Grand] needed to show that the parties intended to exclude this type of dispute form the scope of the arbitration clause, … not merely that the arbitration clause lacked explicit language covering Grand’s claims.

Because Grand could not do this, the First Circuit reversed the District Court’s ruling and mandated that all claims be arbitrated.

For in-house counsel, the lesson of Grand Wireless is very clear: if you want to utilize an arbitration clause for some, but not all, disputes, be sure that you describe with great specificity what is and what is not to be covered by that clause.  Failing to do so could result in your client being forced to arbitrate a dispute that it wanted to be litigated in court.