Yesterday, the Third Circuit issued an important decision examining the availability of limited discovery and the standards courts should use in determining whether the parties entered into an agreement to arbitrate. Guidotti v. Legal Helpers Debt Resolution, LLC, No. 12-1170 (3rd Cir. May 28, 2013). (Click here for a copy of the opinion.) I have noticed that in practice, a variety of procedures are used in asking a court to compel arbitration. For example, some parties file a Rule 12b1 motion to dismiss for lack of subject matter jurisdiction, a Rule 12b6 motion to dismiss for failure to state a claim, a Rule 56 motion for summary judgment, a petition pursuant to section 4 of the FAA, and/or a motion for stay pursuant to section 3 of the FAA.
In the key part of the opinion, the Third Circuit set forth the following framework and procedures regarding the enforcement of an arbitration agreement:
[W]hen it is apparent, based on the face of a complaint, and documents relied upon in the complaint, that certain of a party’s claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery’s delay. But if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue, then the parties should be entitled to discovery on the question of arbitrability before a court entertains further briefing on [the] question. After limited discovery, the court may entertain a renewed motion to compel arbitration, this time judging the motion under a summary judgment standard. In the event that summary judgment is not warranted because the party opposing arbitration can demonstrate, by means of citations to the record, that there is a genuine dispute as to the enforceability of the arbitration clause, the court may then proceed summarily to a trial regarding the making of the arbitration agreement or the failure, neglect, or refusal to perform the same, as Section 4 of the FAA envisions. (internal citations and quotation marks omitted).
The particular case started out as a class action against several defendants involved in consumer debt settlement. There was some evidence that the plaintiff consumer received a bank account agreement containing an arbitration clause several weeks after opening the bank account, while the defendants claimed the consumer received the agreement with an initial package of documents. Because the making of the agreement was at issue, the Third Circuit found that the lower court should have allowed for limited discovery regarding the making of the agreement.
I expect parties will frequently cite to this Guidotti opinion in order to engage in discovery regarding the making of the agreement, and a typical case may now proceed as follows: plaintiff files a lawsuit, defendant moves to compel arbitration, plaintiff comes forward with conflicting evidence regarding the making of the agreement, discovery occurs because of the procedures established by Guidotti, and then a renewed motion to compel arbitration is filed, and possibly even a trial may occur regarding the making of the agreement. There is an often-overlooked provision in section 4 of the FAA, and I wish the Third Circuit would have addressed this provision. According to section 4, before a party asks a court to compel arbitration, the party must give 5 days written notice to the opposing party. I have seen parties and courts ignore this provision in practice. Although this five-day period is rather short, this five-day window could allow the parties an opportunity to discuss whether there is conflicting evidence and whether further discovery is needed so that the court will not be bothered by a premature motion to compel arbitration prior to the development of the factual record.