Mid-South Maintenance Inc. v. Paychex Inc. ( 2015 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
June 9, 2015 Session
MID-SOUTH MAINTENANCE INC., ET AL. v. PAYCHEX INC., ET AL.
Appeal from the Chancery Court for Shelby County
No. CH140676 Jim Kyle, Chancellor
________________________________
No. W2014-02329-COA-R3-CV – Filed August 14, 2015
_________________________________
This is an arbitration case, wherein plaintiffs and the defendant-signatory expressly agreed to
arbitrate any disputes arising from the contract and further agreed that the contract would be
governed by New York law. Plaintiffs later filed suit against the defendant-signatory, as well
as one of the defendant‘s employees, who had not signed the arbitration agreement, for
breach of fiduciary duty, negligence, and aiding and abetting conversion. Defendants filed a
motion to compel arbitration. The trial court denied the motion to compel arbitration on the
ground that the plaintiff‘s claims were outside the scope of the arbitration agreement, citing
Tennessee law. We hold that, pursuant to federal and New York law, because of the
delegation clause contained in the arbitration agreement, the arbitrator is the proper tribunal
to determine issues regarding the scope and unconscionability of the arbitration agreement.
We also hold that because plaintiffs‘ claims against the non-signatory employee are
intertwined with the claims against the signatory defendant, all disputes regarding the
arbitrability of claims against the non-signatory employee must also be resolved by the
arbitrator. Reversed and remanded.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed
and Remanded
J. STEVEN STAFFORD, P.J., W.S., delivered the opinion of the Court, in which Arnold B.
Goldin, J., and Brandon O. Gibson, J., joined.
Michael E. Keeney and Casey Shannon, Memphis, Tennessee, for the appellants, Paychex,
Inc., and Robert Cunningham.
Bruce S. Kramer and Anne E. Kutsikovich, Memphis, Tennessee, for the appellees, Mid-
South Maintenance, Inc., an Oklahoma corporation, Mid-South Maintenance, Inc., a
Tennessee corporation, and Worldwide Steel Works, Inc., an Oklahoma corporation.
OPINION
Background
Plaintiffs/Appellees Mid-South Maintenance, Inc. (Oklahoma), Mid-South
Maintenance, Inc. (Tennessee), and Worldwide Steel Works, Inc. (Oklahoma) (collectively,
―Appellees‖)1 hired Kimberly Burk to serve as a bookkeeper in October 2005. Thereafter,
Appellees assert that Ms. Burk convinced Appellees to enter into several contracts (―the
Agreements‖) over the course of a year with Defendant/Appellant Paychex, Inc.,
(―Paychex‖)2 for Paychex to provide payroll, ―taxpay[,]‖ workers‘ compensation, and 401(k)
services for the Appellees and their employees. In return for these services, Paychex was paid
certain agreed-upon fees. Defendant/Appellant Robert Cunningham (together with Paychex,
―Appellants‖) served as a client services representative with Paychex and was the primary
contact between Appellees and Appellants. Mr. Cunningham worked out of Paychex‘s
Tennessee office.
According to Appellees, from 2007 to 2011, Ms. Burk manipulated the Paychex
system to embezzle $1.8 million from the Appellees. Accordingly, on April 25, 2014,
Appellees filed a complaint in the Shelby County Chancery Court against Paychex and Mr.
Cunningham for breach of fiduciary duty, negligence, and aiding and abetting conversion.
According to the complaint, Mr. Cunningham was the primary contact between Ms. Burk and
Paychex, and that he, either negligently or intentionally, provided information to Ms. Burk
that she used to embezzle funds. Appellees asserted that Paychex negligently supervised Mr.
Cunningham, negligently failed to detect the manipulation of its services, failed to employ
proper safeguards, and failed to inform Appellees of the theft although their employees had
knowledge of it and/or turned a blind eye to the misconduct. The complaint sought
compensatory and punitive damages, as well as reimbursement for ―all costs and expenses
charged against [Appellees] by Paychex during the term of the Agreements.‖ Attached to the
complaint were copies of several contracts between the parties. Although the contracts all
indicate that they span four pages, only pages one and three of each contract were attached to
the complaint.
1
All of the appellee companies share common ownership.
2
Although Paychex is incorporated under the laws of Delaware, Paychex asserts that its headquarters is located
in Rochester, New York.
2
On May 27, 2014, Appellants filed a motion to compel arbitration based upon the
various contracts between the parties. Appellants included with their motion what they
alleged was the missing page four of the parties‘ contracts, which included an arbitration
clause. Specifically, this clause provided, in relevant part:
19. Governing Law and Arbitration. The Agreement shall be
governed by the laws of the State of New York. Except as
provided herein, any dispute arising out of, or in connection
with the Agreement shall be determined by binding
arbitration in Rochester, New York, in accordance with the
commercial rules of the American Arbitration Association
[(hereinafter, ―AAA Rules‖)]. Any dispute arising under the
agreement shall be brought within two (2) years of when the
claim accrued. The arbitrator shall not be authorized to award
exemplary or punitive damages. Paychex may, in its sole
discretion, commence an action in any court of competent
jurisdiction within the County of Monroe, State of New York,
for any monies due and owing from Client to Paychex.
(Emphasis in original).
On June 23, 2014, Appellees responded in opposition, asserting several reasons for
opposing arbitration. First, Appellees asserted that they were never provided full copies of
the Agreements, specifically the pages that referenced arbitration. Next, Appellees argued
that Tennessee law controlled because the complaint‘s torts claims were outside the scope of
the arbitration provision. Appellees also argued that the agreements were unconscionable
contracts of adhesion and that the arbitration provisions should not be enforced. Finally,
Appellees asserted that the trial court, rather than the arbitrator, was the proper authority to
determine these questions.
Appellants filed a reply to Appellees‘ response on September 25, 2014. In their reply,
Appellants contended that all of the Agreements entered into between Appellees and Paychex
contained the arbitration provision above and that, therefore, the arbitration provisions should
be enforced. Further, Appellants argued that based upon the plain language of the arbitration
clause, New York law controlled because of the choice of law provision contained in the
parties‘ agreement and the fact that Paychex‘s headquarters is located in New York.
Accordingly, Appellants argued that the trial court was bound to follow New York caselaw
holding that when considering arbitration provisions that incorporated the AAA Rules, issues
of enforceability are to be determined by the arbitrator. Appellants further argued that the
3
contracts are not unconscionable, that the claims asserted by the Appellees fell within the
scope of the arbitration agreement, and that the claims against Mr. Cunningham individually
were also subject to binding arbitration.
The trial court held a hearing on the motion to compel arbitration on October 3, 2014.
On October 24, 2014, the trial court entered an order denying the motion to compel
arbitration on the basis that the claims asserted by Appellees were torts, rather than breaches
of contract. Specifically, the trial court stated:
Whether the parties have an enforceable arbitration agreement is
an issue the Court must decide. Taylor v. Butler, 142 S.W.3d
277, 284 (Tenn. 2004). The [Appellees] contend that the
arbitration clause in the Agreements between the parties requires
arbitration of the [Appellees‘] claims. . . .
As the Court stated at the October 3, 2014, hearing on the
[Appellants‘] Motion to Compel Arbitration, the Court finds that
the [Appellees‘] lawsuit is grounded in tort and therefore the
disputes between the parties do not ―arise out of or in
connection with the Agreement‖ and the [Appellants‘] Motion
to Compel Arbitration should therefore be denied.
Appellants appealed.
Issues Presented
Appellants raise two issues on appeal, which are taken, and slightly restated, from
their appellate brief:
1. Whether the trial court committed reversible error in denying
Appellees‘ Motion to Compel Arbitration, finding that the scope
of the arbitration provisions of the Agreements do not include
Appellees‘ tort claims?
2. Whether the Agreements and their arbitration provision should
be enforced and the parties ordered to arbitrate Appellees‘
claims?
As discussed in detail, infra, Appellees did not raise any affirmative issues on appeal.
Standard of Review
4
When ruling on the appeal of a denial of a motion to compel arbitration, we follow the
standard of review that applies to bench trials. Spann v. Am. Express Travel Related Servs.
Co., 224 S.W.3d 698, 706–07 (Tenn. Ct. App. 2006). Accordingly, our review of the trial
court‘s findings of fact is ―de novo upon the record of the trial court, accompanied by a
presumption of the correctness of the finding, unless the preponderance of the evidence is
otherwise.‖ Tenn. R. App. P. 13(d). Questions of law are likewise reviewed de novo without
a presumption of correctness. Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn. 2001).
To the extent that this dispute requires us to interpret the parties‘ contract, we apply
the rules governing interpretation of all contracts. See Frizzell Constr. Co. v. Gatlinburg,
L.L.C., 9 S.W.3d 79, 85 (Tenn. 1999). According to the Tennessee Supreme Court:
[T]he ―cardinal rule [in interpreting contracts] . . . is to ascertain
the intention of the parties and to give effect to that intention,
consistent with legal principles.‖ Bob Pearsall Motors, Inc. v.
Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578, 580 (Tenn.
1975). Courts may determine the intention of the parties ―by a
fair construction of the terms and provisions of the contract, by
the subject matter to which it has reference, by the
circumstances of the particular transaction giving rise to the
question, and by the construction placed on the agreement by the
parties in carrying out its terms.‖ Penske Truck Leasing Co. v.
Huddleston, 795 S.W.2d 669, 671 (Tenn. 1990). No single
clause in a contract is to be viewed in isolation; rather, the
contract is to be ―viewed from beginning to end and all its terms
must pass in review, for one clause may modify, limit or
illuminate another.‖ Cocke County Bd. of Highway Comm’rs v.
Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn. 1985).
Frizzell, 9 S.W.3d at 85.
Discussion
Controlling Law
As an initial matter, this Court must determine which state‘s law controls this dispute.
The trial court referenced only Tennessee law in its final order; accordingly, we must assume
that the trial court ruled that Tennessee law controlled the dispute in this case. Appellees urge
this Court to affirm the trial court‘s ruling, arguing that because the issues in this case
involve only a tort, the dispute should be determined by the law of the state with the most
significant relationship to the tort. See generally Hataway v. McKinley, 830 S.W.2d 53, 59
(Tenn. 1992). Because Appellees contend that Tennessee has the most significant
5
relationship to the torts at issue and Tennessee law generally provides that issues of the scope
of arbitration and the enforcement of an arbitration provision should be decided by the trial
court, Appellees argue that the trial court properly considered the dispute in this case. See
generally Frizzell, 9 S.W.3d at 85 (―Tennessee law contemplates judicial resolution of
contract formation issues.‖); Wright Med. Tech., Inc. v. Orthomatrix, Inc., No. W2000-
02744-COA-R3CV, 2001 WL 523992, at *7 (Tenn. Ct. App. May 17, 2001) (holding that the
trial court did not overstep its jurisdictional limits in deciding the issue of arbitrability);
Estate of Wyatt, No. 02A01-9706-PB-00132, 1998 WL 477668, at *3 (Tenn. Ct. App. Aug.
17, 1998) (holding that ―the first task of a court asked to compel arbitration of a dispute is to
determine whether the parties agreed to arbitrate that dispute‖).
In contrast, Appellants assert that this Court must apply the law applicable to the
arbitration provision to determine whether the Appellees‘ tort claims fall within the scope of
the arbitration agreement. We take guidance from two Tennessee Supreme Court cases on
this issue, Frizzell Construction Co. v. Gatlinburg, L.L.C., 9 S.W.3d 79 (Tenn. 1999), and
Taylor v. Butler, 142 S.W.3d 277, 282 (Tenn. 2004). In both cases, the plaintiffs filed
complaints alleging several causes of action, including claims of fraudulent inducement.
Defendants in both cases filed motions to compel arbitration. Although both arbitration
provisions were governed by the Federal Arbitration Act (―FAA‖), the arbitration agreement
in Frizzell included an additional provision stating that Tennessee law would govern the
contract. Frizzell, 9 S.W.3d at 81. In both cases, however, the Tennessee Supreme Court
considered the governing law provisions of both parties‘ contracts to determine the scope of
arbitration rather than general Tennessee law. Of course, because the Frizzell arbitration law
was governed by Tennessee law, the Tennessee Supreme Court applied Tennessee caselaw to
hold that a fraudulent inducement claim was to be determined by the trial court. Id. In
contrast, in Taylor, the Tennessee Supreme Court held that the FAA provided that a
fraudulent inducement claim should be decided by the arbitrator. Taylor, 142 S.W.3d at 282.
Regardless of the differing outcomes, the two cases were consistent in that, when
considering the scope of an arbitration clause, the court will still consider the contract‘s
language, including any choice of law provision, as well as general law applicable to the
arbitration clause, in order to determine whether a claim falls within the scope of arbitration.
Accordingly, regardless of the fact that Appellees claim that the parties‘ contract should not
be relevant in determining what law to apply to the question of whether their claims fall
within the scope of arbitration, both Frizzell and Taylor indicate otherwise. Indeed, this
Court was faced with a highly analogous situation in Dale Supply Co. v. York Int’l Corp.,
No. M2002-01408-COA-R3CV, 2003 WL 22309461 (Tenn. Ct. App. Oct. 9, 2003). The sole
issue in Dale Supply involved whether the parties‘ arbitration agreement required that the
parties arbitrate the plaintiff‘s tort claims concerning acts that arose after the parties‘
contractual relationship ended. Id. at *1. In order to determine this issue, the Court of
6
Appeals first considered the law applicable to the parties‘ arbitration agreement, which the
Court then utilized to determine the scope of the arbitration. Id. at *3–*4. Nowhere in the
Opinion does the Court consider the conflict of law rules applicable solely to torts, despite
what Appellees argue. See generally id. at *1–*6; see also Clayton v. Davidson Contractors,
LLC, No. E2013-02296-COA-R3-CV, 2015 WL 1880973, at *7 (Tenn. Ct. App. Apr. 24,
2015) (considering federal arbitration law before determining if a valid contract containing
an arbitration clause had been agreed to by the parties). Accordingly, we too must consider
the law applicable to the arbitration provision in order to determine the proper scope of
arbitration.
Appellants first argue that the parties‘ agreement to arbitrate is governed by the FAA
because it concerns matters of interstate commerce. We agree. According to the Tennessee
Supreme Court:
The FAA applies to ―a written provision in any maritime
transaction or a contract evidencing a transaction involving
interstate commerce[3] to settle by arbitration a controversy
thereafter arising out of such contract or transaction.‖ 9 U.S.C. §
2 (1994). The purpose of the FAA is ―to ensure the
enforceability, according to their terms, of private agreements to
arbitrate.‖ Mastrobuono v. Shearson Lehman Hutton, Inc., 514
U.S. 52, 57, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995) (quoting
Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior
Univ., 489 U.S. 468, 476, 109 S. Ct. 1248, 103 L. Ed. 2d 488
(1989)). Generally, arbitration ―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.‖
United Steelworkers of Am. v. Warrior & Gulf Navigation Co.,
363 U.S. 574, 582–83, 80 S. Ct. 1347, 4 L. Ed. 2d 1409 (1960).
Taylor v. Butler, 142 S.W.3d 277, 281 (Tenn. 2004). Although the Taylor Opinion involved
an arbitration provision that expressly cited the FAA, see id. at 280, this Court has held that
the FAA ―governs the enforcement of any agreement to arbitrate in contracts that involve
interstate commerce. Dale Supply, 2003 WL 22309461, at *3 (describing the conclusion as
―incontestable‖) (citing Tenn. River Pulp & Paper Co. v. Eichleay Corp., 637 S.W.2d 853,
3
The actual language of 9 U.S.C. § 2 requires only that the contract involve ―commerce,‖ rather than interstate
commerce. See Federal Arbitration Act, ch. 392, § 1, 61 Stat. 669 (1947) (codified at 9 U.S.C. § 2 ). This
portion of the statute has not been amended since its enactment. Section 1 of the FAA, however, defines
―commerce‖ as, inter alia, ―among the several States,‖ i.e., interstate commerce. See 9 U.S.C. § 1.
Accordingly, the typographical error in Taylor does not affect our analysis.
7
855 (Tenn. 1982) (―When a transaction clearly involves interstate commerce, the Act should
apply equally in state and federal courts[.]‖); Berkley v. H & R Block E. Tax Servs., Inc., 30
S.W.3d 341, 343 (Tenn. Ct. App. 2000) (applying the FAA to the arbitration agreement at
issue); see also Guffy v. Toll Bros. Real Estate, No. M2003-01810-COA-R3CV, 2004 WL
2412627, at *5 (Tenn. Ct. App. Oct. 27, 2004) (―If, based on all of the relevant contract
documents, the trial court determines that the parties did not expressly agree that the FAA
would govern their arbitration agreement, the court must then go further and determine
whether the FAA applies because the ―contract evidenc[es] a transaction involving
commerce,‖ thereby bringing it within the ambit of the FAA[.]‖). Because the contract in
Dale Supply involved ―the flow of goods, services, reports and payments between‖ two
different states, the Court of Appeals concluded that the contract involved interstate
commerce and was governed by the FAA. Dale Supply, 2003 WL 22309461, at *3 (―Since
the Agreement between [the parties] involves interstate commerce, case law arising under the
FAA applies to interpret the scope of the arbitration clause to determine whether [plaintiff‘s]
tort claims . . . are arbitrable.‖). Likewise in this case, Paychex is a corporation incorporated
in Delaware and headquartered in New York. The Appellee companies do business in both
Tennessee and Oklahoma. The purpose of the contracts was for Paychex to provide payroll,
taxpay, workers‘ compensation, and 401(k) services for the Appellees. To this end, the
contract required a flow of services, reports, and payments between the three states involved
in this contract. The Tennessee Supreme Court has recognized that the United States
Supreme Court has interpreted the term ―involving commerce‖ as used in the FAA as
―encompass[ing] ‗the broadest permissible exercise of Congress‘ Commerce Clause power.‘‖
Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 604 (Tenn. 2013) (quoting Citizens
Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 156 L. Ed. 2d 46 (2003) (per
curiam)). Under these circumstances, we must conclude that the contracts between Appellees
and Paychex involve interstate commerce. Accordingly, the FAA governs these transactions.
That is not to say, however, that state law never plays a part in disputes covered by the
FAA. Instead, ―[w]hen deciding whether the parties agreed to arbitrate a certain matter
(including arbitrability), courts generally . . . should apply ordinary state-law principles that
govern the formation of contracts.‖ First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
944, 115 S. Ct. 1920, 1924, 131 L. Ed. 2d 985 (1995). Moreover, the Tennessee Supreme
Court has noted that the United States Supreme Court has held that even in arbitrations
governed by the FAA, ―parties may choose the arbitration law by which they intend to be
governed.‖ Frizzell Constr. Co. v. Gatlinburg, L.L.C., 9 S.W.3d 79, 86 (Tenn. 1999) (citing
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S. Ct. 1212, 1216,
131 L. Ed. 2d 76 (1995) (holding that parties to an arbitration agreement may ―specify by
contract the rules under which that arbitration will be conducted.‖)); see also Owens v. Nat’l
Health Corp., 263 S.W.3d 876, 883 (Tenn. 2007) (―[P]arties to an arbitration agreement are
at liberty to choose the terms under which they will arbitrate, and a contract that might
8
ordinarily be governed by the [FAA] may provide that it will be governed by a particular
state‘s [law].‖). Thus, under both the FAA and Tennessee law, parties may choose, through a
choice of law contractual provision, the law upon which the arbitration at issue will be
conducted.
Here, the parties‘ arbitration provision clearly indicates that it should be ―governed by
the laws of the State of New York.‖ Appellees contend, however, that this Court should not
enforce this choice of law provision because the parties and their transaction have no rational
relationship with New York. We respectfully disagree. ―Tennessee will honor a choice of law
clause if the state whose law is chosen bears a reasonable relation to the transaction and
absent a violation of the forum state‘s public policy.‖ Wright v. Rains, 106 S.W.3d 678, 681
(Tenn. Ct. App. 2003) (quoting Bright v. Spaghetti Warehouse, Inc., No. 03A01-9708-CV-
00377, 1998 WL 205757, at *5, (Tenn. Ct. App. April 29, 1998)). The record reflects that
Paychex is headquartered in New York State4, and nothing in the record indicates that
applying New York law to this case would violate Tennessee‘s public policy. Accordingly,
the parties‘ choice of law provision is binding on this Court.
Appellees next contend that the trial court properly decided the question of the scope
of the parties‘ arbitration agreement because the law surrounding that issue is procedural,
rather than substantive. The Appellees are correct in their assertion that the forum, in this
case a Tennessee state court, will apply its own procedural law. See In re Stalcup’s Estate,
627 S.W.2d 364, 368 (Tenn. Ct. App. 1981); Sherwin Williams Co. v. Morris, 25 Tenn.App.
272, 156 S.W.2d 350, 352 (Tenn. Ct. App. 1941). To support this argument, Appellees cite
two Tennessee Supreme Court cases. First, in Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn.
1996), the Tennessee Supreme Court held that arbitration agreements ―do not limit liability,
but instead designate a forum that is alternative to and independent of the judicial forum.‖ Id.
at 319. Next, in Taylor v. Butler, the Tennessee Supreme Court held that the arbitration
provisions at issue ―only relate[d] to remedy,‖ and, therefore, were collateral to and severable
from the remaining contractual provisions. Taylor, 142 S.W.3d at 287. Because Appellees
contend that matters related only to remedy are properly classified as procedural, they argue
that Tennessee‘s law should apply to this dispute. See generally 16 Am. Jur. 2d Conflict of
Laws § 93 (―Matters of procedure in a contract action, as well as issues of remedy, are
generally governed by the law of the forum.‖) (footnotes omitted).
We again respectfully disagree. The Tennessee Supreme Court has specifically held
that the FAA ―contains federal substantive law requiring the parties and the courts to honor
4
The copies of the agreements that were attached to Appellees‘ complaint indicate that Paychex ―is located in
Rochester, New York.‖ In addition, the record contains a computer-generated print-out from the Paychex
website providing the address for the Paychex headquarters in Rochester, New York. Appellees have offered
nothing to rebut Paychex‘s contention that it is headquartered in New York.
9
arbitration agreements.‖ Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595, 606 (Tenn.
2013) (emphasis added) (citing Southland Corp. v. Keating, 465 U.S. 1, 15 n. 9, 104 S. Ct.
852, 79 L. Ed. 2d 1 (1984). Indeed, Tennessee state courts considering the arbitrability of
certain claims, the very question presented in this appeal, have uniformly applied the
substantive law of the FAA to determine the dispute, so long as the parties did not otherwise
manifest an intent to be governed by Tennessee law. See Taylor, 142 S.W.3d at 287
(applying the FAA to determine whether a particular claim would be arbitrated, even though
FAA conflicted with Tennessee law); Frizzell, 9 S.W.3d at 81 (applying Tennessee law to
determine whether a claim would be arbitrated only because the contract choice of law
provision provided that Tennessee law would control); Thornton v. Allenbrooke Nursing &
Rehab. Ctr., LLC, No. W2007-00950-COA-R3-CV, 2008 WL 2687697, at *5 (Tenn. Ct.
App. July 3, 2008) (holding that where the parties have entered into a valid arbitration
agreement, a choice of law provision indicating that the arbitration shall be governed by the
FAA is binding); Flanary v. Carl Gregory Dodge of Johnson City, LLC, No. E2004-00620-
COA-R3CV, 2005 WL 1277850, at *8 (Tenn. Ct. App. May 31, 2005) (holding that question
of what claims were properly decided by the arbitrator was resolved by application of federal,
rather than state, law, as the arbitration contract expressly provided it would be governed by
the FAA); Dale Supply, 2003 WL 22309461, at *3 (applying the FAA to determine whether
the plaintiff‘s tort claims should be decided by the arbitrator). Further, in at least one other
case, this Court. onsidering an arbitration clause that provided it would be governed by the
laws of Ohio looked to the law of Ohio to determine the enforceability of the arbitration
clause at issue. See Credit Gen. Ins. Co. v. Ins. Serv. Grp., Inc., No. E2007-00033-COA-
R3CV, 2007 WL 2198475, at *2–*3 (Tenn. Ct. App. July 31, 2007) (involving whether an
arbitration clause could be enforced by an insurance company in liquidation). Thus, the Court
implicitly held that, under Tennessee law, the law governing the arbitration was substantive
rather than procedural. Id.5 Appellees have cited no cases in which Tennessee courts have
declined to apply the FAA or the parties‘ chosen law to the interpretation and enforcement of
an arbitration provision on the ground that the law involved was procedural, rather than
substantive. Accordingly, we conclude that Tennessee courts have uniformly held that the
law surrounding the arbitrability of claims and the enforcement and interpretation of
arbitration clauses are substantive in nature. Consequently, we will apply the FAA and New
York state law to substantive matters, while Tennessee law will govern procedural issues.
Appellees argue, however, that even applying New York law to this dispute results in
Tennessee law being applied, as Appellees contend that the issue of enforcement of an
5
Interestingly, however, upon consideration of Ohio law, the Court of Appeals concluded that Ohio law
provides that ―issue of arbitration was a procedural remedy to be decided pursuant to the law of the forum
state.‖ Id. at *2. Accordingly, although the law was substantive in Tennessee, thus requiring the Court to look
to Ohio law, the same law was procedural in Ohio, requiring the Court to return to application of Tennessee
law. Id. at *2–*3.
10
arbitration agreement is a matter of procedural law in New York. Accordingly, much like the
procedure in Credit General, discussed supra, Appellees argue that New York law requires
that this Court apply Tennessee law, as it is the law of the forum. To support this argument,
Appellees rely on the New York case of Berkovitz v. Arbib & Houlberg, 230 N.Y. 261, 130
N.E. 288 (N.Y. 1921), which holds that ―[t]he common-law limitation upon the enforcement
of promises to arbitrate is part of the law of remedies,‖ which requires application of the law
of the forum. Id. at 289–90.
Unfortunately, Appellants chose not to address this issue in either their initial brief or
reply brief to this Court. We note, however, that the rule recited in Berkovitz expressly
applies to arbitration agreements that are governed solely by the common law, rather than by
federal statute. Indeed, the FAA was not enacted until July 1947, see Federal Arbitration Act,
ch. 392, § 1, 61 Stat. 669 (1947) (codified at 9 U.S.C. § 2), after the decision in Berkovitz or
any of the subsequent cases that cite Berkovitz for this proposition. See In re Gantt, 189
Misc. 237, 242, 70 N.Y.S.2d 55, 59 (N.Y. Sup. Ct. March 27, 1947), aff’d sub nom. Gantt v.
Hurtado & CIA, 272 A.D. 801, 71 N.Y.S.2d 892 (N.Y. App. Div. 1947) (affirming without
Opinion), aff’d sub nom. Gantt v. Felipe Y. Carlos Hurtado & CIA, 297 N.Y. 433, 79
N.E.2d 815 (N.Y. 1948) (determining that New York law applied because the parties chose
to submit their dispute in New York, which the Court held was ―a consent of the parties
thereto to the jurisdiction of the supreme court of this state to enforce such contract or
submission;‖ no choice of law provision was contained in the parties‘ contract or discussed);
Christensen v. Morse Dry Dock & Repair Co., 216 A.D. 274, 286, 214 N.Y.S. 732, 744
(N.Y. App. Div. 1926).
More recent cases lead this Court to conclude that the holding in Berkovitz is not
reflective of current New York law. For example, in 2005, the New York Supreme Court
considered the question of whether New York or California law applied to determine whether
the subject arbitration contract was unconscionable and, therefore, unenforceable. See Oce
Bus. Servs., Inc. v. Christensen, 8 Misc. 3d 1017(A), 803 N.Y.S.2d 19, 2005 WL 1712143,
at *3–*4 (N.Y. Sup. Ct. 2005). Had the New York court concluded that the rules governing
arbitration in New York were procedural, the Court would have been bound to follow New
York law. See generally Marine Midland Bank, N.A. v. United Mo. Bank, N.A., 223 A.D.2d
119, 122, 643 N.Y.S.2d 528, 530 (N.Y. Sup. Ct. 1996) (―[U]nder common-law rules matters
of procedure are governed by the law of the forum‖) (citing Martin v. Julius Dierck Equip.
Co., 43 N.Y.2d 583, 588, 374 N.E.2d 97, 99 (N.Y. 1978)). The New York Supreme Court,
however, applied California law to determine the dispute. Christensen, 2005 WL 1712143, at
*3–*4. Accordingly, the Court impliedly held that the issues concerned substantive law,
rather than procedural law.
11
Additionally, the New York Court of Appeals, construing an arbitration agreement
governed by both the FAA and New York law, has concluded that parties are free to choose
the law upon which the arbitration will be conducted. See Smith Barney, Harris Upham &
Co. v. Luckie, 85 N.Y.2d 193, 204–05, 647 N.E.2d 1308, 1315 (N.Y. 1995). Clearly, this
conclusion would not have been warranted if the law upon which arbitration is conducted is
merely procedural in nature. Indeed, the New York Court of Appeals has expressly stated that
―New York honors ‗the parties‘ selection of New York law to govern their agreement and its
enforcement.‘‖ Smith Barney Shearson Inc. v. Sacharow, 238 A.D.2d 155, 157, 656
N.Y.S.2d 203, 205 (N.Y. Sup. Ct. 1997), aff’d, 91 N.Y.2d 39, 689 N.E.2d 884 (N.Y. 1997)
(quoting Smith Barney, Harris Upham & Co. v. Luckie, 85 N.Y.2d 193, 202, 647 N.E.2d
1308, 1313 (N.Y. 1995)). In our view, if a New York court would be bound to honor the
parties‘ choice of law provision, so too would this Court applying New York law be bound.
See also Windsor United Indus., LLC v. Windsor Fixtures, Inc., 28 Misc. 3d 1202(A), 911
N.Y.S.2d 697, 2010 WL 2574057, at *2 n.1 (N.Y. Sup. Ct. 2010) (holding that ―New York‘s
own conflicts of laws principles would similarly require that the parties[‘] choice of law
provision be honored‖ in the arbitration context). Under these circumstances, we conclude
that the arbitration rules at issue, specifically with reference to the arbitrability of certain
disputes, constitute rules of substantive law. Accordingly, the law of the forum will not
apply; instead, this Court will ―apply ordinary [New York] state-law principles that govern
the formation of contracts‖ and federal substantive law, where applicable, to determine the
issues in this case. First Options, 514 U.S. at 944.
Arbitrability
Our analysis in this case concerns the arbitrability of three key issues: (1) whether
Appellees‘ claims fall within the scope of the arbitration agreement; (2) whether the
arbitration provision of the parties‘ contract is unconscionable; and (3) whether Appellees‘
claims against Mr. Cunningham are arbitrable. The United States Supreme Court has defined
arbitrability as ―a gateway dispute about whether the parties are bound by a given arbitration
clause[.]‖ Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S. Ct. 588, 592, 154
L. Ed. 2d 491 (2002). Accordingly, these issues concern whether the trial court or the
arbitrator is the proper tribunal for determining these issues.
Before we can address the merits of New York law on these issues, we must first
consider a preliminary issue. Initially, we note that throughout the trial court proceedings,
Appellees maintained that they never received a copy of the purported arbitration agreement
between the parties; therefore, Appellees argued that they had not actually agreed to arbitrate
any disputes in accordance with the arbitration agreement. Although unclear from their brief,
it appears that Appellants argue that this question is a question of arbitrability that must be
determined by the arbitrator. We respectfully disagree.
12
The United States Supreme Court in Granite Rock Co. v. International Brotherhood
of Teamsters, 561 U.S. 287, 130 S. Ct. 2847, 177 L. Ed. 2d 567 (2010), addressed this issue.
Specifically in Granite Rock, the parties seeking to avoid arbitration alleged that the
collective bargaining agreement that contained the arbitration clause was not properly ratified
and, therefore, not binding. Id. at 296. Thus, the parties disputed whether they ever formed a
binding contract containing an arbitration provision.
The Court emphasized that: ―It is well settled in both commercial and labor cases that
whether parties have agreed to ‗submi[t] a particular dispute to arbitration‘ is typically an
‗issue for judicial determination.‘‖ Id. (quoting Howsam v. Dean Witter Reynolds, Inc., 537
U.S. 79, 83, 123 S. Ct. 588, 154 L. Ed. 2d 491 (2002)). According to the Granite Rock Court:
―It is similarly well settled that where the dispute at issue concerns contract formation, the
dispute is generally for courts to decide.‖ Granite Rock, 561 U.S. at 296. Based upon these
principles, the Court held:
[This case] require[s] us to reemphasize the proper framework
for deciding when disputes are arbitrable under our precedents.
Under that framework, a court may order arbitration of a
particular dispute only where the court is satisfied that the
parties agreed to arbitrate that dispute. . . . To satisfy itself that
such agreement exists, the court must resolve any issue that calls
into question the formation or applicability of the specific
arbitration clause that a party seeks to have the court enforce. . .
. Where there is no provision validly committing them to an
arbitrator, . . . these issues typically concern the scope of the
arbitration clause and its enforceability. In addition, these issues
always include whether the clause was agreed to, and may
include when that agreement was formed.
Id. at 297 (internal citations removed for clarity of reading). The Court further held that
questions of whether and when a contract was formed ―require[] judicial resolution‖ because
they relate to whether the parties consented to arbitrate. Id. at 303. As the Court explained,
despite the policy favoring arbitration inherent in federal law:
[E]xcept where ―the parties clearly and unmistakably provide
otherwise,‖ . . . it is ―the court‘s duty to interpret the agreement
and to determine whether the parties intended to arbitrate
grievances concerning‖ a particular matter[.] . . . They then
discharge this duty by: (1) applying the presumption of
13
arbitrability only where a validly formed and enforceable
arbitration agreement is ambiguous about whether it covers the
dispute at hand; and (2) adhering to the presumption and
ordering arbitration only where the presumption is not rebutted.
Id. at 301 (internal citations removed for clarity of reading). Thus, questions of contract
formation must be determined by the court, rather than the arbitrator.
The Granite Rock decision has been cited favorably by New York Courts applying
both FAA and New York law. See Pers. Commc’ns Devices, LLC v. HTC Am., Inc., 40
Misc. 3d 790, 796, 970 N.Y.S.2d 370, 376 (N.Y. Sup. Ct. 2013) (―Although there exists a
presumption of arbitrability where a valid and enforceable arbitration agreement has been
formed, such presumption has been limited to those instances where the party seeking to
enforce arbitration demonstrates that the parties have in fact agreed to submit the dispute in
question to arbitration.‖); Brean Capital, LLC v. NewOak Capital LLC, 46 Misc. 3d
1203(A), 9 N.Y.S.3d 592, 2014 WL 7269750, at *3 (N.Y. Sup. Ct. 2014) (―[I]n FAA cases,
the presumption in favor of arbitrability should only be applied ‗where a validly formed and
enforceable arbitration agreement is ambiguous about whether it covers the dispute at
hand[.]‘‖) (quoting Granite Rock, 561 U.S. at 302).
Although not binding precedent in this case, we note that this Court has also
considered the Granite Rock Opinion with regard to an arbitration agreement governed by
the FAA. See Clayton v. Davidson Contractors, LLC, No. E2013-02296-COA-R3-CV, 2015
WL 1880973 (Tenn. Ct. App. Apr. 24, 2015). According to this Court, Granite Rock stands
for the proposition that:
[W]hen a party claims it never concluded an agreement at all, it is for
the court, not the arbitrator, to determine whether the parties agreed to
the arbitration provision upon which the party seeking arbitration relies.
Granite Rock, 561 U.S. at 299–300. Although there is a federal policy
favoring arbitration, that policy does not override the principle of
consent. Id. at 302.
Clayton, 2015 WL 1880973, at *7. In Clayton, this Court determined that the parties‘
argument constituted a ―classic formation issue‖: the parties argued that ―a contract was
never formed.‖ Id. at *8. Thus, the Court concluded that this issue should be resolved by the
court. Id. (―If the [plaintiffs] were compelled to arbitrate whether they agreed to the warranty
contract, including the delegation provision, the arbitrator would determine his own authority
to decide the parties‘ dispute. If the arbitrator concluded the parties did not have a contract,
the arbitrator had no authority to decide the dispute. If the arbitrator concluded the parties did
have a contract, the arbitrator effectively granted himself jurisdiction.‖). Accordingly, the
14
Clayton Court vacated the trial court‘s judgment and remanded for the trial court to
determine the threshold question of whether the plaintiffs entered into the underlying
contract, including its arbitration provision. Id.
Based upon the holding in Granite Rock, the issue of whether a contract containing an
arbitration provision was formed remains a question that must be determined by the court as
a threshold matter. We note, however, that Appellees failed to designate the question of
whether a contract was ever formed between the parties that included an arbitration provision
as an issue in their appellate brief. It is well-settled that this Court will ―consider an issue
waived where it is argued in the brief but not designated as an issue‖ in the appellant‘s brief.
See Childress v. Union Realty Co., 97 S.W.3d 573, 578 (Tenn. Ct. App. 2002). This rule
applies equally to appellees who seek affirmative relief from this Court. See Forbess v.
Forbess, 370 S.W.3d 347, 358 (Tenn. Ct. App. 2011) (holding that because the appellee was
―dissatisfied‖ with the trial court‘s ruling, ―the rules require that he was to present his own
statement of the issues for review‖; failure to designate argument as issue in statement of
issues resulted in waiver of argument on appeal). Accordingly, if Appellees‘ argument
regarding the formation of the contract seeks affirmative relief from this Court, their failure
to designate this argument as an issue in their brief will be fatal to this Court‘s review. See
also Wilson v. City of Memphis, No. W2014-01822-COA-R3-CV, 2015 WL 4198769, at
*11 (Tenn. Ct. App. July 13, 2015) (―Because [petitioner] prevailed in the trial court in
reversing the judgment of the Commission and only seeks to uphold the trial court‘s
judgment, she does not appear to be seeking any affirmative relief from this Court.
Accordingly, her failure to brief this issue does not result in a waiver.‖).
In order to determine if Appellees waived this argument, we must consider the trial
court‘s judgment. Here, the trial court‘s order does not contain an explicit finding that the
parties entered into a contract containing an agreement to arbitrate. The trial court‘s order
does, however, conclude that the Appellees‘ claims do not fall within the scope of the
arbitration clause and applies Tennessee arbitration law to reach this decision. The Tennessee
Supreme Court‘s recent Opinion in Morgan Keegan & Co. v. Smythe, 401 S.W.3d 595
(Tenn. 2013), is instructive on this issue.
In Smythe, the parties disagreed as to whether the trial court‘s order vacating an
arbitration award was immediately appealable. Id. at 603. Pursuant to the Tennessee Uniform
Arbitration Act, several orders by the trial court with regard to arbitration are immediately
appealable, including orders denying an arbitration award or orders ―vacating an award
without directing a re-hearing.‖ Id. at 603–04 (quoting Tenn. Code Ann. § 29-5-319(a)).
Although the Smythe Court held that the contract was governed by the FAA, the Court
determined that the order was nevertheless appealable pursuant to Tennessee law, as
Tennessee‘s arbitration appeal provisions are procedural, rather than substantive, and do not
stand as an obstacle to the purposes and objectives of the FAA. Id. at 607.
15
The question remained, however, as to whether the trial court‘s order sufficiently
complied with the Tennessee Uniform Arbitration Act to allow an immediate appeal. In
Smythe, the trial court vacated the arbitration award and remanded for a rehearing without
expressly denying confirmation of the arbitration award. Id. at 604. Accordingly, the trial
court‘s express ruling did not fall within any of the specific orders that were immediately
appealable pursuant to the Tennessee Uniform Arbitration Act. See generally Tenn. Code
Ann. § 29-5-319(a). The plaintiff argued that ―the lack of explicit language denying
confirmation of the award necessarily means that the order cannot be considered ―an order . .
. denying confirmation of an award‖ for the purpose of Tenn. Code Ann. § 29-5-319(a)[.]‖
Smythe, 401 S.W.3d at 608.
The Tennessee Supreme Court disagreed. Instead, the Court held that:
When an order or judgment permits more than one
interpretation, it should be construed with reference to the issues
it was meant to decide, In re Langenfeld, 160 N.H. 85, 993
A.2d 232, 236 (2010), and should be interpreted in light of the
context in which it was entered, as well as the other parts of the
record, including the pleadings, motions, issues before the court,
and arguments of counsel. Kiefer v. Rust–Oleum Corp., 394
Ill.App.3d 485, 333 Ill. Dec. 903, 916 N.E.2d 22, 29 (2009); see
also Los Angeles Local Joint Exec. Bd. of Culinary Workers v.
Stan’s Drive–Ins, Inc., 136 Cal. App. 2d 89, 288 P.2d 286, 290
(1955) (―The rule with respect to orders and judgments is that
the entire record may be examined to determine their scope and
effect . . . .‖).
Court orders and judgments, like other documents, often
speak as clearly through implication as they do through express
statements. Accordingly, when construing orders and judgments,
effect must be given to that which is clearly implied, as well as
to that which is expressly stated. Sosin v. Sosin, 300 Conn. 205,
14 A.3d 307, 316 (2011); Dairyland, Inc. v. Jenison, 207
N.W.2d 753, 754 (Iowa 1973); State ex rel. State Farm Mut.
Auto. Ins. Co. v. Bedell, 228 W.Va. 252, 719 S.E.2d 722, 737
(2011).
16
Smythe, 401 S.W.3d at 608. The Tennessee Supreme Court indicated that such a rule was
necessary to ensure ―the expeditious disposition of an arbitration.‖ Id. at 609 (quoting David
D. Siegel, Practice Commentary: Appeals from Arbitrability Determinations, 9 U.S.C.A. §
16, at 747 (―[A]rbitration is a form of dispute resolution designed to save the parties time,
money, and effort by substituting for the litigation process the advantages of speed,
simplicity, and economy associated with arbitration. Its theme is that judicial involvement in
the process should be kept to the barest minimum to avoid undermining those goals.‖)). Thus,
the Court concluded that the trial court‘s order necessarily denied the defendant‘s request for
confirmation of the arbitration award when it granted the plaintiff‘s motion to vacate the
award. Accordingly, the Tennessee Supreme Court held that the order entered by the trial
court was immediately appealable. Smythe, 401 S.W.3d at 612.
Two holdings from Smythe are important to this case: (1) that trial courts‘ orders in
the arbitration context must be construed considering both what is expressly stated and what
is clearly implied; and (2) that this is a procedural rule in Tennessee that is not preempted or
superseded by the FAA. Because Tennessee courts apply Tennessee procedural law, the
Smythe Court‘s holdings are applicable in this case. See Stalcup’s Estate, 627 S.W.2d at
368; Sherwin Williams, 156 S.W.2d at 352; see also Payne v. CSX Transp., Inc., No.
E2012-02392-SC-R11-CV, 2015 WL 3991141, at *15 (Tenn. July 1, 2015) (applying the
Smythe holding to a claim governed by federal law).
Applying the holding in Smythe to the trial court‘s order in this case, we must
conclude that a finding that the parties‘ contract contained an arbitration provision, while not
expressly stated, was ―clearly implied.‖ Id. Here, the trial court denied arbitration by finding
that the Appellees‘ tort claims ―do not ‗arise out of or in connection with the Agreement[.]‘‖
This holding implies that the parties‘ contract indeed contains an arbitration provision.
Moreover, the trial court applied the Tennessee Supreme Court‘s decision in Taylor v.
Butler, 142 S.W.3d 277, 284 (Tenn. 2004), to determine its ruling; the Taylor case concerned
a contract containing an arbitration agreement. Accordingly, the trial court‘s order must be
construed to include a finding that the parties‘ agreement contains an arbitration clause, as
argued by the Appellants.
Based upon our conclusion that the trial court‘s order contained an implicit finding
that a contract had been formed between the parties including an arbitration provision, we
must conclude that Appellees‘ argument that no agreement regarding arbitration exists
constitutes dissatisfaction with the trial court‘s order. Accordingly, if this Court were to
determine that no agreement to arbitrate existed, we would be granting affirmative relief to
the Appellees. However, as previously discussed, Appellees did not include this issue in a
statement of the issues section of their appellate brief; indeed, Appellees‘ appellate brief
contains no statement of the issues section. Although Appellees did include their contention
as an alternative argument in the argument section of their appellate brief, this is insufficient
17
to raise this issue on appeal. See Rountree v. Rountree, 369 S.W.3d 122, 130 (Tenn. Ct. App.
2012) (―We may consider an issue waived where it is argued in the brief but not designated
as an issue.‖) (citing Childress, 97 S.W.3d at 578). Consequently, this issue is waived, and
we may proceed to consider the question of the arbitrability of the parties‘ disputes based
upon the parties‘ agreement to arbitrate.
II. Scope of Arbitration
We next consider whether, pursuant to New York state law,6 the issue of the scope of
the parties‘ arbitration clause should be decided by the court or by the arbitrator. We
conclude that this issue is properly decided by the arbitrator.
In this case, the parties expressly agreed to conduct any arbitration ―arising out of, or
in connection‖ with the Agreements pursuant to the AAA Rules. Nowhere in the record do
Appellants cite to the actual version of the AAA Rules applicable to this case. However,
Appellees do not appear to dispute that the applicable AAA Rules provide, in pertinent part,
that the arbitrator ―shall have the power to rule on his or her own jurisdiction, including any
objections with respect to the existence, scope, or validity of the arbitration agreement or to
the arbitrability of any claim or counterclaim.‖ The interpretation of the above language in
arbitration agreements is not an issue of first impression in New York.
First, we note that the general law in New York provides that ―the question of
arbitrability is an issue generally for judicial determination in the first instance[.]‖ Smith
Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 45, 689 N.E.2d 884, 887 (N.Y. 1997)
(citing Matter of Primex Intl. Corp. v. Wal-Mart Stores, 89 N.Y.2d 594, 657 N.Y.S.2d 385,
679 N.E.2d 624, 626 (N.Y. 1997)). The New York Court of Appeals, however, has
recognized an exception that ―recognizes, respects and enforces a commitment by the parties,
nevertheless, to arbitrate even that issue when they ‗clearly and unmistakably [so]
provide[.]‘‖ Sacharow, 689 N.E.2d at 887 (quoting AT & T Techs. v. Commc’ns Workers,
475 U.S. 643, 649, 106 S. Ct. 1415, 1418–1419, 89 L. Ed. 2d 648 (1986)). Accordingly, the
Court of Appeals directed courts to ―examine and determine whether the parties here evinced
6
In Holzer v. Mondadori, No. 12 CIV. 5234 NRB, 2013 WL 1104269 (S.D.N.Y. Mar. 14, 2013), the District
Court for the Southern District of New York indicated that in determining ―the question of who decides
arbitrability,‖ some courts ―have been reluctant to apply a choice-of-law provision . . . , as it concerns ‗the
allocation of power between courts and arbitrators.‘‖ Id. at *6 (quoting FR 8 Singapore Pte. Ltd. v. Albacore
Maritime Inc., 794 F. Supp. 2d 449, 453 (S.D. N.Y. 2011)). Instead, these courts have applied only federal law.
As discussed in detail infra, it appears that New York state courts have consistently applied federal law on this
issue, so that there is no tangible distinction between the two. Accordingly, we will apply New York law to this
issue in accordance with the parties‘ choice of law provision.
18
a ‗clear and unmistakable‘ agreement to arbitrate arbitrability as part of their alternative
dispute resolution choice.‖7 Sacharow, 689 N.E.2d at 887.
Although the Court in Sacharow was not called upon to consider whether the AAA
Rules at issue in this case evince a ―clear and unmistakable‖ agreement to arbitrate
arbitrability, other New York courts have considered this issue and answered in the
affirmative. See In re Application of R D Mgmt. Corp., 196 Misc. 2d 579, 766 N.Y.S.2d 304
(N.Y. Sup. Ct. 2003); Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 66
A.D.3d 495, 888 N.Y.S.2d 458 (N.Y. Sup. Ct. 2009), aff’d, 14 N.Y.3d 850, 927 N.E.2d 553
(N.Y. 2010). First, in R D Management, the parties entered into several contracts containing
similarly worded arbitration provisions. These provisions obligated the parties to resolve
―any dispute‖ by arbitration pursuant to the AAA Rules. Id. at 306. Although the contract did
not expressly state that it was governed by the FAA, the Court concluded that the FAA came
―into play‖ because the contract concerned interstate commerce. Id. The Court further
concluded that the inclusion of the AAA rule expanding the jurisdiction of the arbitrator to
include issues of arbitrability, as cited above, ―grants the arbitrator the power to decide the
scope of the arbitration clause.‖ Id. at 307. According to the Court, such a provision ―has
been construed as a delegation of the issue of arbitrability to the arbitrator.‖ Id. Although the
Court recognized that New York law provides that ―the arbitrability of a particular claim is
ordinarily an issue for judicial determination,‖ Id. (citing Matter of Primex, 679 N.E.2d at
626), the Court concluded that the inclusion of the AAA Rules manifested the parties‘ intent
that ―any questions regarding the arbitrability of the claims [asserted] must be resolved by the
arbitration panel.‖ R D Mgmt. Corp., 766 N.Y.S.2d at 307.
The R D Management Court noted that its decision followed several United States
District Court cases in cases likewise governed by the FAA. Id. at 305 (citing Sleeper Farms
v. Agway, Inc., 211 F Supp 2d 197 (D.Me 2002); Brandon, Jones, Sandall, Zeide, Kohn,
Chalal & Musso, P.A. v. MedPartners, Inc., 203 F.R.D. 677 (S.D. Fla. 2001), aff’d. 312
F.3d 1349 (11th Cir. 2002); Prof’l Sports Tickets & Tours, Inc. v. Bridgeview Bank Grp.,
No. CIV. A. 01-991, 2001 WL 1090148, at *5 (E.D. Pa. Sept. 13, 2001)). Indeed, our
research has revealed that federal courts considering arbitration contracts governed by the
7
We note that the Federal Circuit has added an additional layer of judicial review over this question. In
Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006), the Federal Circuit held that after being
satisfied that the parties ―did clearly and unmistakably intend to delegate the power to decide arbitrability to an
arbitrator,‖ the court should then ―determine whether the assertion of arbitrability is ‗wholly groundless.‘‖ Id.
at 1371 (quoting Dream Theater, Inc. v. Dream Theater, 124 Cal. App. 4th 547, 21 Cal. Rptr. 3d 322, 326 (Cal.
2004)). Neither New York state courts, nor the Second Circuit Court of Appeals have adopted the requirements
set forth in Qualcomm. Additionally, the Qualcomm holding has never been adopted by the United States
Supreme Court. Instead, it appears that only the Federal, Fourth, and Fifth Circuit courts have applied the
―wholly groundless‖ rule to determine the arbitrability of a specific dispute. As such, we decline to apply the
rule established in Qualcomm to this case.
19
FAA have consistently held that by incorporating the AAA Rules into an arbitration
agreement, the parties clearly and unmistakably manifested an intent to allow the arbitrator to
resolve all questions of arbitrability. See Contec Corp. v. Remote Solution, Co., 398 F.3d
205, 208 (2d Cir. 2005) (―We have held that when, as here, parties explicitly incorporate
rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as
clear and unmistakable evidence of the parties‘ intent to delegate such issues to an
arbitrator.‖); Fallo v. High–Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009) (―Consequently,
we conclude that the arbitration provision‘s incorporation of the AAA Rules . . . constitutes a
clear and unmistakable expression of the parties‘ intent to leave the question of arbitrability
to an arbitrator.‖); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1074 (9th Cir.
2013) (―Virtually every circuit to have considered the issue has determined that incorporation
of the American Arbitration Association‘s (AAA) arbitration rules constitutes clear and
unmistakable evidence that the parties agreed to arbitrate arbitrability.‖); Terminix Int’l Co.,
LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332 (11th Cir. 2005) (―By incorporating
the AAA Rules . . . into their agreement, the parties clearly and unmistakably agreed that the
arbitrator should decide whether the arbitration clause is valid.‖); Haire v. Smith, Currie &
Hancock LLP, 925 F. Supp. 2d 126, 132 (D.D.C. Cir. 2013) (holding that incorporation of
AAA Rules is clear and unmistakable delegation of arbitrability and noting that ―a recent
D.C. Circuit opinion strongly suggests that the D.C. Circuit would view incorporation of the
AAA Rules as satisfying the requisite standard‖).
New York courts reaffirmed the conclusion in R D Management in Goshawk. 888
N.Y.S.2d 458. In Goshawk, the Court was again faced with a contract concerning interstate
commerce that provided that ―[a]ll disputes and differences arising under or in connection
with this [contract] . . . be referred to arbitration under the [AAA] Rules.‖ Id. at 495. The
Court concluded that:
Although the question of arbitrability is generally an issue for
judicial determination, when the parties‘ agreement specifically
incorporates by reference the AAA Rules, which provide that
―[t]he tribunal shall have the power to rule on its own
jurisdiction, including objections with respect to the existence,
scope or validity of the arbitration agreement,‖ and employs
language referring ―all disputes‖ to arbitration, courts will
―leave the question of arbitrability to the arbitrators[.]‖
Id. at 496. Thus, the Court held that ―the scope and validity of the arbitration agreement,
necessarily including issues of arbitrability, are for the arbitration tribunal to determine.‖ Id.
The New York Court of Appeals later affirmed the Supreme Court‘s determination that ―the
scope and validity of the parties‘ arbitration agreement, including issues of arbitrability, are
for the arbitration tribunal to determine[.]‖ Life Receivables Trust v. Goshawk Syndicate
20
102 at Lloyd’s, 14 N.Y.3d 850, 851, 927 N.E.2d 553 (N.Y. 2010). Accordingly, it appears to
be settled law in New York that by incorporating the AAA Rules into an agreement to
arbitrate, the parties manifested a clear and unmistakable intent to have issues of arbitrability,
including the scope and validity of an arbitration clause, decided by the arbitrator.
Here, the arbitration clause contained in the parties‘ contracts clearly indicates that the
arbitration shall be conducted ―in accordance with‖ the AAA Rules. There is no dispute that
the applicable rules provide that issues of arbitrability, including questions regarding the
―existence, scope, or validity of the arbitration agreement‖ are to be determined by the
arbitrator. Thus, pursuant to the rules established in R D Management and Goshawk and
affirmed by the New York Court of Appeals, the parties in this case clearly and unmistakably
intended that any issues as to the scope of the arbitration agreement should be decided by the
arbitrator. Accordingly, the trial court erred in considering this question.
II. Unconscionability
We note that both parties‘ briefs raise an additional argument regarding the purported
unconscionability of the arbitration agreement. The trial court‘s order again does not address
this issue. However, nothing in the trial court‘s order expressly states or clearly implies a
ruling on this issue. See Smythe, 401 S.W.3d at 608. Moreover, this argument is clearly
contemplated in Appellants‘ second issue presented: whether the arbitration agreement
should be enforced and Appellees compelled to arbitrate their claims. Generally, when the
trial court fails to address an issue in the first instance, this Court will not consider the issue,
but will instead remand for the trial court to make a determination in the first instance. See,
e.g., Farmers Mut. of Tennessee v. Atkins, No. E2011-01903-COA-R9-CV, 2012 WL
982998, at *4 (Tenn. Ct. App. March 21, 2012) (declining to consider a matter when no
initial determination was made by the trial court); Shaffer v. Memphis Airport Authority,
Service Management Systems, Inc., No. W2012-00237-COA-R9-CV, 2013 WL 209309, at
*4 (Tenn. Ct. App. Jan.18, 2013) (―In an interlocutory appeal, as well as in an appeal as of
right, the appellate court considers only questions that were actually adjudicated by the trial
court.‖); Reid v. Reid, 388 S.W.3d 292, 294 (Tenn. Ct. App. 2012) (―The jurisdiction of this
Court is appellate only; we cannot hear proof and decide the merits of the parties‘ allegations
in the first instance.‖); In re Estate of Boykin, 295 S .W.3d 632, 636 (Tenn. Ct. App. 2008)
(―At the appellate level, we are limited in authority to the adjudication of issues that are
presented and decided in the trial courts.‖); Davidson v. Myers, No. C.A. 152, 1990 WL
198906, at *1 (Tenn. Ct. App. Dec. 12, 1990) (remanding to the trial court to consider the
issues of damages and specific performance, which had not been determined by the trial
court). However, because this case involves arbitration, we must also keep in mind our goal
to ensure ―the expeditious disposition of an arbitration.‖ Smythe, 401 S.W.3d at 609 (noting
that the goal of both Tennessee arbitration law and the FAA is to ―provide an efficient
procedure when judicial assistance is necessary‖ and that judicial involvement should be kept
21
to a minimum to ensure that the goals of ―speed, simplicity, and economy‖ inherent in the
arbitration system can be met). Because it is our duty to ensure that disputes subject to
arbitration are determined with speed, simplicity, and minimal judicial intervention, and this
dispute must be resolved in order to fully adjudicate the issues raised by Appellants on
appeal, we will proceed to consider this issue.
In both the prior proceedings and this Court, Appellees argued that the court should
not compel arbitration because the arbitration agreement is unconscionable. Specifically, on
appeal, Appellees urge this Court to refuse to enforce the arbitration agreement on the ground
of unconscionability because: (1) the arbitration provision lacks mutuality, in that the
arbitration provision allows Paychex, but not Appellees, to opt out of arbitration; (2) the
arbitration provision is hidden in boilerplate language and fails to adequately describe its
effect on Appellees‘ rights, remedies, and claims; and (3) the arbitration provision is so
restrictive with regard to timeliness of claims and relief allowed that it ―almost entirely
insulate[s] Paychex from liability.‖
Although not entirely clear in their appellate brief, it appears that Appellants argue
that this too should be decided by the arbitrator based upon the parties‘ delegation provision.
We agree. In 2010 the United States Supreme Court addressed a similar issue in Rent-A-
Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 177 L. Ed. 2d 403 (2010).8 In
Rent-A-Center, the plaintiff filed an employment discrimination lawsuit in federal district
court against his former employer. Id. at 65. Prior to his employment, the employee signed a
Mutual Agreement to Arbitrate Claims Agreement, which provided that ―t]he Arbitrator, and
not any federal, state, or local court or agency, shall have exclusive authority to resolve any
dispute relating to the interpretation, applicability, enforceability or formation of this
Agreement including, but not limited to any claim that all or any part of this Agreement is
void or voidable.‖ Id. at 66. The employer filed a motion to compel arbitration, which motion
the plaintiff opposed on the ground that the arbitration agreement in question was
unconscionable. The District Court rejected the plaintiff‘s argument, finding that because the
plaintiff claimed that the agreement as a whole was unconscionable, under the FAA, such
question was to be decided by the arbitrator pursuant to the contract‘s delegation clause. The
Court of Appeals for the Ninth Circuit reversed and held that where ―a party challenges an
arbitration agreement as unconscionable and, thus, asserts that he could not meaningfully
assent to the agreement, the threshold question of unconscionability is for the court.‖ Id. at
66–67.
The United States Supreme Court granted certiorari, and a majority of the Court
reversed the Ninth Circuit‘s holding. First, the Supreme Court reiterated that the contract was
governed by the FAA, as it concerned interstate commerce. Id. at 68. The Supreme Court
8
Neither party cites Rent-A-Center in their appellate brief.
22
then discussed the effect of the delegation provision contained within the employment
contract. According to the Court, the FAA operates to enforce a delegation provision ―just as
it does any other‖ arbitration agreement. Id. at 68–69. Finally, the Court held that because
the delegation clause referred all issues of enforcement of the agreement to the arbitrator,
only a challenge to the delegation clause of the parties‘ arbitration agreement could be heard
by the court. Id. at 70–72.
To reach this holding, the United States Supreme Court divided validity
challenges to arbitration agreements into two categories:
―One type challenges specifically the validity of the agreement
to arbitrate,‖ and ―[t]he other challenges the contract as a whole,
either on a ground that directly affects the entire agreement (e.g.,
the agreement was fraudulently induced), or on the ground that
the illegality of one of the contract‘s provisions renders the
whole contract invalid.‖ Buckeye [Check Cashing Inc. v.
Cardegna], 546 U.S. [440,] at 444, 126 S. Ct. 1204 [(2006)]. In a
line of cases neither party has asked us to overrule, we held that
only the first type of challenge is relevant to a court‘s
determination whether the arbitration agreement at issue is
enforceable. See Prima Paint Corp. v. Flood & Conklin Mfg.
Co., 388 U.S. 395, 403–404, 87 S. Ct. 1801, 18 L. Ed. 2d 1270
(1967); Buckeye, supra, at 444–446, 126 S. Ct. 1204; Preston v.
Ferrer, 552 U.S. 346, 353–354, 128 S. Ct. 978, 169 L. Ed. 2d 917
(2008).
Rent-A-Ctr., 561 U.S. at 70 (footnote omitted). The Court explained its rationale for this
rule:
That is because § 2 [of the FAA], states that a ―written
provision‖ ―to settle by arbitration a controversy‖ is ―valid,
irrevocable, and enforceable‖ without mention of the validity of
the contract in which it is contained. Thus, a party‘s challenge to
another provision of the contract, or to the contract as a whole,
does not prevent a court from enforcing a specific agreement to
arbitrate. ―[A]s a matter of substantive federal arbitration law,
an arbitration provision is severable from the remainder of the
contract.‖ Buckeye, 546 U.S., at 445, 126 S. Ct. 1204; see also
id., at 447, 126 S. Ct. 1204 (the severability rule is based on § 2).
23
Rent-A-Ctr., 561 U.S. at 70–71. Accordingly, the Court held that an agreement to arbitrate is
severable from the underlying contract. Id. (citing Buckeye, 546 U.S., at 445 (holding that
this was a matter of ―federal substantive law‖ that must be applied by both federal and state
courts)).
Because of the severability of arbitration provisions from underlying contracts, the
Court held that only challenges to the exact arbitration provision at issue were properly
considered by the court. Rent-A-Ctr., 561 U.S. at 71. As the Rent-A-Center Court explained:
But that agreements to arbitrate are severable does not mean that
they are unassailable. If a party challenges the validity under § 2
of the precise agreement to arbitrate at issue, the federal court
must consider the challenge before ordering compliance with
that agreement under § 4. In Prima Paint [Corp. v. Conklin
Mfg. Co], for example, if the claim had been ―fraud in the
inducement of the arbitration clause itself,‖ then the court would
have considered it. 9 388 U.S. [395,] 403–404, 87 S. Ct. 1801
(1967).
Rent-A-Ctr., 561 U.S. at 71. Importantly, the Court required that the party challenge ―the
precise agreement to arbitrate at issue‖ in order to vest authority to decide the issue with the
court rather than the arbitrator. Id. (emphasis added). In Rent-A-Center, there were
essentially two agreements: (1) the Mutual Agreement to Arbitrate Claims Agreement; and
(2) the delegation clause of the arbitration agreement. Because the parties‘ arbitration
agreement gave the arbitrator ―exclusive authority to resolve any dispute relating to the . . .
enforceability . . . of this Agreement,‖ the Rent-A-Center Court concluded that ―unless [the
plaintiff] challenged the delegation provision specifically, we must treat it as valid under § 2
[of the FAA], and must enforce it under §§ 3 and 4 [of the FAA], leaving any challenge to
the validity of the Agreement as a whole for the arbitrator.‖ Id. at 72–73. Because the
plaintiff did not specifically challenge the delegation provision in opposing arbitration, the
United States Supreme Court held that his claim that the arbitration agreement was
unconscionable was an issue to be decided by the arbitrator. Id. at 73–74.
The rule established in Rent-A-Center has never been specifically applied by New
York courts applying New York law.10 Two factors lead this Court to believe that the Rent-
9
Instead, in Prima Paint, the plaintiff argued that the contract as a whole was fraudulently induced. Prima
Paint, 388 U.S. at 402. The United States Supreme Court held that because the parties‘ agreement provided
that ―[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration‖ pursuant to the AAA Rules, that questions regarding the fraudulent inducement of the
contract as a whole were properly decided by the arbitrator, rather than the court. Id. at 404–06.
10
The only New York case to reference Rent-A-Center is Monarch Consulting, Inc. v. Nat’l Union Fire Ins.
24
A-Center rule should apply in this case. First, as discussed in detail above, both New York
cases involving delegation clauses in arbitration contracts have followed federal FAA
jurisprudence, despite the fact that the United States Supreme Court has indicated that courts
may apply ordinary state-law principles to contract formation issues. First Options, 514 U.S.
at 944; see also Goshawk, 14 N.Y.3d at 851 (applying federal FAA law); Goshawk, 66
A.D.3d 495 (same); R D Mgmt., 766 N.Y.S.2d 304 (same).
More importantly, the holding in Rent-A-Center rests on the doctrine that arbitration
clauses are severable from the underlying agreements within which they are contained. See
Rent-A-Ctr., 561 U.S. at 70–71. The doctrine of severability constitutes federal substantive
law that applies ―regardless of whether the challenge is brought in federal or state court.‖
Buckeye, 546 U.S. at 449. As explained by the New York Supreme Court:
[I]n 2006 the Supreme Court held in Buckeye Check Cashing,
Inc. v. Cardegna that ―even in the context of state-law claims
brought in state court, the FAA created a body of federal
substantive law which applies in both state and federal courts
and state law cannot bar enforcement.‖ 546 U.S. 440, 1209
(2006) (internal citations omitted). While plaintiff has not raised
the issue of whether state or federal law applies in this case, it is
important to note that this court must rule on this issue in
accordance with the U.S. Supreme Court.
Cheng v. David Learner Assocs., Inc., 35 Misc. 3d 1238(A), 954 N.Y.S.2d 758 (N.Y. Sup.
Ct. 2012) (emphasis added). Thus, even New York courts have held that with regard to issues
involving the severability of agreements to arbitrate, federal substantive law controls.
Because Rent-A-Center operates as an extension of the rule adopted in Buckeye, we must
conclude that the rule adopted in Rent-A-Center applies to this case despite the parties‘
decision to apply New York law to their agreement. Accordingly, we turn to consider
whether the unconscionability challenge in this case falls within the narrow category of
challenges that may be adjudicated by the courts pursuant to the Rent-A-Center Opinion.
Co. of Pittsburgh, 123 A.D.3d 51, 993 N.Y.S.2d 275 (N.Y. 2014). Monarch, however, involves the question
of whether an insurance company‘s failure to comply with California‘s insurance regulations renders the
arbitration agreements unenforceable. See Id. at 70–72. The New York Supreme Court concluded that they did,
regardless of ―whether the insureds challenge the arbitration clause itself, or rather, whether they challenge the
entire agreement.‖ Id. at 72. The Court based its decision on the fact that federal law provides that state law is
supreme in insurance regulation. Id. at 59 (citing 15 U.S.C. § 1011 (―Congress hereby declares that the
continued regulation and taxation by the several States of the business of insurance is in the public interest, and
that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or
taxation of such business by the several States.‖). Because Monarch involved the application of California
insurance regulations, which are governed solely by California law, it is not particularly persuasive in this case.
25
In this case, the arbitration agreements at issue clearly contain language providing that
the arbitration will be conducted pursuant to the AAA Rules. Further, there is no dispute that
the AAA Rules provide that the arbitrator, rather than the court, ―shall have the power to rule
on . . . any objections with respect to the existence, scope, or validity of the arbitration
agreement or to the arbitrability of any claim or counterclaim.‖ As previously discussed, we
have concluded that, applying New York law, such a delegation provision ―clearly and
unmistakably‖ evinces the parties‘ intent to have gateway questions, such as the scope of
arbitration, decided by the arbitrator. Under these circumstances, pursuant to Rent-A-Center,
the only issue that may be decided by a court is the question of whether the ―precise
agreement at issue,‖ i.e., the delegation provision, is unconscionable.
We note that while the contract in Rent-A-Center is analogous to the Agreements in
this case, they are not identical. First, it must be noted that the underlying contract in Rent-A-
Center was the arbitration agreement, rather than a commercial services agreement like in
this case. Accordingly, while in Rent-A-Center, there were two agreements—the arbitration
agreement and the delegation provision—in this case, there are three agreements: (1) the
service agreement between Appellees and Paychex; (2) the arbitration provision; and (3) the
delegation provision included in the agreement by virtue of the incorporation of the AAA
rules. This complication certainly adds to the sentiment that we are applying a ―Russian
nesting dolls‖ aspect to severability of arbitration contracts. See Rent-A-Ctr., 561 U.S. at 86
(Stevens, J., dissenting) (suggesting that the new layer of severability is ―something akin to
Russian nesting dolls‖). Schumacher Homes of Circleville, Inc. v. Spencer, ___ S.E.2d ___,
No. 14-0441, 2015 WL 1880234, at *7 (W. Va. Apr. 24, 2015) (echoing the Rent-A-Center
dissent‘s opinion). However, the majority in Rent-A-Center holds that the fact that the
arbitration agreement at issue was not contained within a contract ―unrelated to arbitration . .
. makes no difference‖ to the analysis. Id. at 72. Accordingly, we are constrained to follow
the precedent set by the Supreme Court in Rent-A-Center even where, as here, the arbitration
provision is contained within a contract unrelated to arbitration. See Schumacher Homes,
2015 WL 1880234, at *7 (criticizing the rule established in Rent-A-Center as ―absurd,‖ but
ultimately holding ―this is the law‖).
Another difference between this case and Rent-A-Center involves the language of the
delegation clauses at issue. In Rent-A-Center, the Supreme Court held that the question of
whether the arbitration agreement was unconscionable had been delegated to the arbitrator,
relying on the contract language that ―any dispute relating to the . . . enforceability . . . of
this Agreement‖ would be referred to arbitration. Rent-A-Ctr., 561 U.S. at 72 (emphasis
added). In this case, however, the language of the delegation provision does not expressly
refer issues of enforceability to the arbitrator but instead refers issues regarding the
―existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim
or counterclaim.‖ We note, however, that the Rent-A-Center Court appears to use the terms
26
―enforceability‖ and ―validity‖ interchangeably. For example, while the Rent-A-Center
parties‘ contract clearly uses the term enforceability, the Rent-A-Center Court concludes that
a challenge to ―validity‖ must consider ―the precise agreement to arbitrate at issue.‖ Rent-A-
Ctr., 561 U.S. at 70. Accordingly, we conclude that the parties‘ decision to delegate
challenges to the validity of the agreement at issue in this case to the arbitrator is sufficient to
bring this case within the ambit of Rent-A-Center.
Based on the forgoing, we conclude that Rent-A-Center is controlling law in this case.
Accordingly, because of the delegation clause in the parties‘ arbitration agreement, only a
specific challenge to the unconscionability of the delegation clause may be heard by the
court. Any challenges to the underlying services agreement or the arbitration agreement as a
whole have been delegated to the arbitrator. After a thorough review of the record, we must
conclude that Appellees have failed to challenge the delegation provision contained in their
arbitration agreement. As previously discussed, the Appellees argued that the arbitration
agreement was unconscionable, on grounds of lack of mutuality, surprise, and unfair
advantage to Paychex. None of these allegations directly concern the delegation provision;
indeed, nothing in Appellees‘ response in opposition to the motion to compel or their brief to
this Court specifically takes issue with the delegation provision. Under the circumstances,
applying the rule in Rent-A-Center, we must conclude that Appellees‘ unconscionability
argument does not concern the ―precise agreement at issue.‖ Rent-A-Ctr., 561 U.S. at 70.
Therefore, it is insufficient to place the issue of unconscionability before the trial court.
Instead, any argument concerning the unconscionability of the arbitration agreement is for
the arbitrator to decide.
III. Claims against Mr. Cunningham
Appellees next argue that any claims against Mr. Cunningham should not be subject to
arbitration pursuant to the parties‘ agreement because he was not a signatory to the
agreement. Again, the trial court made no express or implied ruling on this issue, but we will
consider it in light of the Tennessee Supreme Court‘s stated goals regarding judicial
intervention in disputes governed by arbitration agreements. See Smythe, 401 S.W.3d at 608.
Once more, this Court must first determine whether this dispute is properly decided by the
court or by the arbitrator. Fortunately, both New York state and federal courts have
considered this issue and can offer guidance to this Court in our determination.
In Merrill Lynch International Finance, Inc. v. Donaldson, 27 Misc. 3d 391, 895
N.Y.S.2d 698 (N.Y. Sup. Ct. 2010), a similar issue was presented involving whether a
company ―may avoid arbitration because it was not a signatory to the arbitration agreement.‖
Id. at 702. According to the Court:
27
Normally, ―a court will not order a party to submit to arbitration
absent evidence of that party‘s unequivocal intent to arbitrate the
relevant dispute and unless the dispute falls clearly within that
class of claims which the parties agreed to refer to arbitration‖
(Primavera Labs., Inc. v. Avon Prods., Inc., 297 A.D.2d 505,
505, 747 N.Y.S.2d 16 [2002] [internal quotation marks and
citations omitted]). However, the Court of Appeals recognizes
that ―in certain limited circumstances the need to impute the
intent to a non-signatory‖ is appropriate (TNS Holdings, Inc. v.
MKI Sec. Corp., 92 N.Y.2d 335, 339, 680 N.Y.S.2d 891, 703
N.E.2d 749 [1998]). As well, consent to arbitration has been
inferred where the nature of the relationship between a signatory
and non-signatory indicates that the agreement to arbitrate
should be extended in the interest of fairness (Astra Oil Co. v.
Rover Navigation, Ltd., 344 F.3d 276, 280–281 [2d Cir. 2003]).
Donaldson, 895 N.Y.S.2d at 702.
The Court outlined five circumstances in which ―a non-signatory to an agreement may
nevertheless be bound‖: ―(1) incorporation by reference; (2) assumption; (3) agency; (4) veil
piercing/―alter ego‖; and (5) estoppel[.]‖ Id. at 702–03 (citing Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995)). The Donaldson Court was particularly
concerned with the estoppel circumstance, noting that estoppel may be found ―when the
signatory to the contract containing an arbitration clause raises allegations of substantially
interdependent and concerted conduct by both the non-signatory and the other signatory to
the contract.‖ Id. at 703 (citing Denney v. BDO Seidman, LLP, 412 F.3d 58, 70–71 (2d Cir.
2005)). Citing the Second Circuit Court of Appeals, the Court opined:
―We have previously indicated that signatories to an arbitration
agreement can be compelled to arbitrate their claims with a non-
signatory where ―a careful review of the relationship among the
parties, the contracts they signed . . . , and the issues that had
arisen ‗among them discloses that the issues the nonsignatory is
seeking to resolve in arbitration are intertwined with the
agreement that the estopped party has signed.‘‖ JLM Industries
v. Stolt-Nielsen S.A., 387 F.3d 163, 177 (2d Cir. 2004) (quoting
Choctaw Generation Ltd. Partnership v. Am. Home Assurance
Co., 271 F.3d 403, 406 (2d Cir. 2001)); see also Contec Corp. v.
Remote Solution, Co., 398 F.3d 205, 209 (2d Cir. 2005) (―A
useful benchmark for relational sufficiency can be found in our
estoppel decision in Choctaw . . . where we held that the
28
signatory to an arbitration agreement is estopped from avoiding
arbitration with a non-signatory when the issues the non-
signatory is seeking to resolve in arbitration are intertwined with
the agreement that the estopped party has signed.‖ (internal
quotation marks and citation marks omitted)).‖
Donaldson, 895 N.Y.S.2d at 703 (quoting Denney, 412 F.3d at 70). Because the Donaldson
Court concluded that there was ―a close and connected relationship‖ between the signatory
and the non-signatory, to ―justif[y] invocation of the doctrine of equitable estoppel,‖ the
Court ruled that the non-signatory was obligated to arbitrate. Id.
In reaching its decision, the Donaldson Court relied on two Second Circuit Court of
Appeals cases, Denney, as discussed in detail above, and Contec. Analogously to
Donaldson, the Contec Court was required to determine whether a non-signatory could
enforce an agreement to arbitrate against a signatory. Contec, 398 F.3d at 207. The Second
Circuit Court of Appeals, however, considered an additional issue: whether a third-party‘s
―ability as a non-signatory to enforce the arbitration clause is an issue pertaining to the
‗existence, scope or validity of the arbitration agreement‘‖ between the signatories to the
arbitration agreement. Contec, 398 F.3d at 208–09. Like this Court, the Contec Court noted
that while the agreement at issue was governed by New York law, New York law ―follows
the same standard as federal law with respect to who determines arbitrability.‖ Id. at 208 n.1.
The first question, of course, was whether a non-signatory could compel a signatory to
arbitrate the dispute at issue. As the Court explained:
As an initial matter, we recognize that just because a signatory
has agreed to arbitrate issues of arbitrability with another party
does not mean that it must arbitrate with any non-signatory. In
order to decide whether arbitration of arbitrability is
appropriate, a court must first determine whether the
parties have a sufficient relationship to each other and to the
rights created under the agreement. See First Options, 514
U.S. at 944–45, 115 S. Ct. 1920 (discussing the necessity of
threshold determination by courts before referring issues of
arbitrability to arbitrators). A useful benchmark for relational
sufficiency can be found in our estoppel decision in Choctaw
Generation Ltd. P’ship v. Am. Home Assurance Co., where we
held that the signatory to an arbitration agreement ―is estopped
from avoiding arbitration with a non-signatory ‗when the issues
the non-signatory is seeking to resolve in arbitration are
intertwined with the agreement that the estopped party has
29
signed.‘‖ 271 F.3d 403, 404 (2d Cir. 2001)(quoting
Smith/Enron Cogeneration Ltd. P’ship v. Smith Cogeneration
Int’l Inc., 198 F.3d 88, 98 (2d Cir. 1999)). In Choctaw, we
summarized the factors laid out in Smith/Enron as ―the
relationship among the parties, the contracts they signed (or did
not), and the issues that ha[ve] arisen.‖ Id. at 406.
Contec, 398 F.3d at 209 (emphasis added). Based upon these rules, the Contec Court
concluded that there was a sufficient relationship between the parties to allow the non-
signatory to enforce the arbitration agreement against the signatory.
The above determination, however, did not end the inquiry. Instead, the Court next
considered that the issue of whether the parties‘ delegation to the arbitrator of all disputes
concerning the ―existence, scope or validity‖ of the agreement encompassed a dispute
concerning whether a non-signatory was entitled to enforce the arbitration agreement. The
Court concluded that the non-signatory‘s right to enforce the arbitration agreement was a
matter concerning the ―existence, scope or validity‖ of the agreement that had been expressly
delegated to the arbitrator. Id. at 210–211 (citing Apollo Computer, Inc. v. Berg, 886 F.2d
469, 473–74 (1st Cir. 1989)).
As we perceive it, the Contec decision indicates that where the arbitration agreement
at issue contains a broad delegation clause like the one at issue in this case, only the arbitrator
is permitted to consider disputes regarding a non-signatory‘s right to enforce the arbitration
agreement against a signatory. However, as a threshold matter, the court, rather than the
arbitrator, must conduct a preliminary inquiry into ―whether a sufficient relationship exist[s]
between [the parties to the dispute] to compel arbitration even if . . . the arbitrator were to
determine the dispute was not arbitrable.‖ Contec, 398 F.3d at 209.
The question of whether a significant relationship exists between Appellees, Paychex,
and Mr. Cunningham must be determined by considering whether ―the issues the non-
signatory is seeking to resolve in arbitration are intertwined with the agreement that the
estopped party has signed,‖ which includes consideration of the relationships among the
parties, the contracts, and the issues that have arisen. Id. Again, the trial court did not
specifically rule on this issue, either expressly or implicitly. Although we could certainly
remand this issue for a determination by the trial court, several factors lead this Court to
conclude that this issue is ripe for a determination. First, we are, as always, cognizant of our
directive to resolve arbitration disputes swiftly and efficiently. See Smythe, 401 S.W.3d at
608. Next, we note that many of the relevant cases on this issue have determined the issue
without the need for a remand to the trial court. See Contec, 398 F.3d at 211; Astra Oil, 344
F.3d at 282; Choctaw, 271 F.3d at 407–09; Smith/Enron, 198 F.3d at 98; Apollo, 886 F.2d at
473–74.
30
The Second Circuit Opinion in JLM Indus., Inc. v. Stolt-Nielson S.A., 387 F.3d 163
(2d Cir. 2004), is particularly helpful on this issue. In JLM, certain non-signatory defendants
sought to compel the plaintiff-signatory to arbitration. The non-signatory defendants had not
signed all of the contracts at issue; instead some of their subsidiaries had signed the
agreements containing the arbitration provisions. Id. at 177. Nevertheless, after a ―careful
review‖ of the relationships and issues presented, the Second Circuit ruled that the signatory
was bound to arbitrate even against the non-signatories. Id. As an initial matter, the Court
looked to other federal cases to provide guidance on what level of interrelationship was
sufficient to show intertwinement:
[I]n Choctaw, we found that where the merits of an issue
between the parties was bound up with a contract binding one
party and containing an arbitration clause, 271 F.3d at 407, the
―tight relatedness of the parties, contracts and controversies‖
was sufficient to estop the bound party from avoiding
arbitration, id. at 406. Similarly, in Smith/Enron Cogeneration
Ltd. Partnership, Inc. v. Smith Cogeneration International,
Inc., 198 F.3d 88, 98 (2d Cir. 1999), we held that the party
attempting to resist arbitration was estopped from doing so
because it had treated arguably non-signatory companies and
their signatory assignees ―as a single unit‖ in its complaint in a
related lawsuit. Most recently, in Astra Oil Co. v. Rover
Navigation, Ltd., 344 F.3d 276, 281 (2d Cir. 2003), we found
that petitioner Astra could hold respondent Rover to an
arbitration clause to which Astra's affiliate AOT was also a
signatory because of the ―close corporate and operational
relationship between Astra and AOT,‖ because the claims Astra
brought against Rover arose under the agreement binding AOT
and Rover to arbitration, and because in various respects Rover
had treated Astra as a party to the agreement. See also
Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773,
779 (2d Cir.1995) (surveying cases in other circuits in which
signatories have been bound to arbitrate ―because of the close
relationship between the entities involved . . . and [the fact that]
the claims were intimately founded in and intertwined with the
underlying contract obligations‖ (internal quotation marks and
citation omitted)).
JLM, 387 F.3d at 177–178.
31
The JLM Court recognized that the inquiry involved factual issues, but concluded that
the record clearly showed that the issues were sufficiently intertwined to compel arbitration:
While we have cautioned that this estoppel inquiry is
fact-specific, Smith/Enron, 198 F.3d at 97, and have had no
occasion to specify the minimum quantum of ―intertwined-ness‖
required to support a finding of estoppel, Astra Oil, 344 F.3d at
279, we have no difficulty concluding that it is present here. The
questions the [non-signatories] seek to arbitrate are undeniably
intertwined with the [contracts at issue], since as we have
already noted it is the fact of [the plaintiff-signatories‘] entry
into the [contracts at issue] containing allegedly inflated price
terms that gives rise to the claimed injury. See Choctaw, 271
F.3d at 407 (estopping the signatory where the merits of the
dispute the non-signatory seeks to arbitrate are ―bound up with‖
and ―linked textually to‖ the terms of the contract that includes
the arbitration clause); see also MS Dealer Serv. Corp. v.
Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (holding that a
signatory may be estopped ―[w]hen each of a signatory‘s claims
against a non-signatory makes reference to or presumes the
existence of the written agreement‖) (internal quotation marks
omitted). Nor can it be denied that [the plaintiff-signatory]
implicitly recognizes the ―close relationship among the parties . .
. and controversies,‖ or that it has treated the [non-signatories]
―as if [they] were ... signator[ies] to the [contracts].‖ Astra Oil,
344 F.3d at 280. As the [non-signatories] note, the amended
complaint ―repeatedly alleges that, whatever corporate entities
happened to sign the [contracts], [the plaintiff-signatory] was
purchasing shipping services directly from the parents and was
harmed by the allegedly inflated prices charged by those parents
. . . .‖ See Smith/Enron, 198 F.3d at 97, 98 (estopping signatory
where party seeking to avoid arbitration ―treated . . . [the]
related companies as though they were interchangeable‖ and as
―a single unit‖ in its complaint in related litigation).
JLM, 387 F.3d at 177–178.
The same is true in this case. First, we note that the arbitration provision at issue in
this case indicates that ―any dispute‖ in connection with the Agreement would be referred to
arbitration. Accordingly, while the plain language of the arbitration agreement does not
expressly state that non-signatories may compel signatories to arbitrate, the arbitration
32
agreement does not limit arbitration only to parties to the Agreements. See McPheeters v.
McGinn, Smith & Co., 953 F.2d 771, 774 (2d Cir. 1992) (rejecting a non-signatory‘s request
to compel arbitration where the arbitration agreement was expressly limited only to disputes
involving the parties to the contract).
From our review of Appellees‘ complaint, the allegations made by the Appellees
against Mr. Cunningham are clearly intertwined with the allegations against Paychex. First,
we note that there is no dispute that at all times relevant to this dispute Mr. Cunningham was
an employee of Paychex. Although Mr. Cunningham is named separately in the Appellees‘
complaint, the complaint clearly alleges that Paychex should be held vicariously liable for the
conduct of Mr. Cunningham. In fact, Appellees allege that the actions of Mr. Cunningham
were committed in the scope of his employment. As we perceive it, Appellees‘ argument
rests on its allegation that Mr. Cunningham‘s negligent or intentional conduct allowed Ms.
Burk to manipulate the Paychex system to defraud the Appellees. Clearly then, the conduct
and knowledge of Mr. Cunningham will be highly relevant in determining the liability of
Paychex; disputes regarding Mr. Cunningham are therefore ―bound up with‖ the claims
against Paychex. See Choctaw, 271 F.3d at 407.
Further, the claims against both Paychex and Mr. Cunningham appear to presume the
existence of a written agreement between the parties, in that the fraud alleged was only
possible due to the contractual relationship between Appellees and Paychex. See Franklin,
177 F.3d at 947. Appellees also fail to specify if any requested damages would be attributable
to Mr. Cunningham independent of Paychex. Accordingly, the complaint, at times, appears to
treat the liability of Paychex and Mr. Cunningham as a ―single unit[.]‖ See Smith/Enron, 198
F.3d at 97, 98. Under these circumstances, we conclude that the claims alleged in Appellees‘
complaint represent a ―tight relatedness‖ of the type that is sufficient to allow any dispute
regarding the arbitrability of claims against Mr. Cunningham to be referred the arbitrator.
Conclusion
The judgment of the Chancery Court of Shelby Court is reversed. This cause shall be
remanded to the trial court for all further proceedings as are necessary and are consistent with
this Opinion. Costs of this appeal are taxed to Appellees, for which execution may issue if
necessary.
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J. STEVEN STAFFORD, JUDGE
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