Schumacher Homes of Circleville v. John and Carolyn Spencer ( 2015 )

No. 14-0441 - Schumacher Homes of Circleville, Inc. v. John Spencer and Carolyn Spencer
FILED
April 24, 2015
RORY L. PERRY II, CLERK
SUPREME COURT OF APPEALS
LOUGHRY, Justice, dissenting: OF WEST VIRGINIA
Once again, a majority of this Court reveals its biases and blatant “judicial
hostility”1 toward arbitration by invalidating a plain and unmistakable agreement between
the parties to arbitrate issues regarding whether a claim is subject to arbitration in the first
instance. Feigning confusion about the term “arbitrability,” the majority concludes that the
circuit court can decide whether the claims of the respondent homeowners, the Spencers, are
subject to arbitration and then leaves untouched the circuit court’s wildly unsupported
conclusion that they are not.
Before delving into the erroneous nature of the slim conclusion that the
majority actually did reach in its opinion, it is necessary to first address the complete
inadequacy of the majority’s opinion as it pertains to the issues properly on appeal. Despite
the petitioner, Schumacher Homes of Circleville, Inc. (“Schumacher”), appealing both the
circuit court’s disregard of the delegation provision–a threshold issue to be determined before
a decision on the enforceability of the arbitration agreement is reached–and the circuit court’s
1
AT&T Mobility LLC v. Concepcion, __ U.S.__, 131 S. Ct. 1740 (2011) (quoting
Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 406 (2d Cir. 1959)).
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findings of unconscionability, the majority limits its opinion to the delegation provision.
Certainly, had the majority properly enforced the delegation provision, which strips the
circuit court of its ability to determine unconscionability, the circuit court’s unconscionability
ruling would be rendered moot. Once the delegation provision is triggered, those issues
belong to the arbitrator–not to the circuit court, nor to this Court–and the majority’s refusal
to address these issues would be proper in that event.
Contrary to the above, the majority concludes that the delegation provision,
which was never challenged below, is not enforceable. Inexplicably, the majority then fails
to address substantively the circuit court’s conclusions regarding unconscionability–all of
which were on appeal to this Court. After castigating the Spencers for failing to respond to
the issues raised on appeal in contravention of our Rules of Appellate Procedure, the majority
then does little more than the Spencers by barely acknowledging Schumacher’s remaining
assignments of error. In fact, the majority disposes of all remaining issues in a single
footnote, devoting four whole sentences to the alleged unconscionability of the arbitration
agreement–the entire basis of the circuit court’s order.2
2
Even assuming arguendo that the issue of unconscionability is reached, the majority’s
terse conclusion that the arbitration agreement is unconscionable is not only unsupported but
is facially incorrect. The majority summarily concludes that because the arbitration
agreement provides that it shall not be “interpreted as [a] waiver of Schumacher’s mechanic’s
lien rights[,]” the agreement lacks mutuality or bilaterality, rendering it unconscionable. I
disagree.
(continued...)
2
Turning now to the complete fallacy underlying the majority’s holding, a brief
factual overview is necessary for context. On June 6, 2011, the Spencers entered into a
contract with Schumacher for the construction of their home in Mason County, West
Virginia. This contract contained an arbitration agreement, which the Spencers separately
2
(...continued)
In syllabus point nine of Dan Ryan Builders, Inc. v. Nelson, 230 W.Va. 281,
737 S.E.2d 550 (2012), we held that “[a] court in its equity powers is charged with the
discretion to determine, on a case-by-case basis, whether a contract provision is so harsh and
overly unfair that it should not be enforced under the doctrine of unconscionability.” In
State ex rel. Ocwen Loan Servicing, LLC v. Webster, 232 W.Va. 341, 752 S.E.2d 372 (2013),
we acknowledged that courts have found a variety of acceptable exclusions in arbitration
agreements that do not render the agreements unconscionable, such as when those exclusions
concern mechanisms, such as security interests. Id., at 365-66, 752 S.E.2d at 396-97.
Similarly, in the case at bar, the preservation of Schumacher’s mechanic’s lien rights is
simply not so harsh or unfair as to provide a sufficient basis for finding the arbitration
agreement to be unconscionable.
The majority’s erroneous “conclusion” is likely occasioned by its disregard of
yet another assignment of error: the circuit court’s failure to address the choice of law
provision in the parties’ contract which provides that their contract will be construed under
Ohio law. We have previously “recognized the presumptive validity of a choice of law
provision, (1) unless the provision bears no substantial relationship to the chosen jurisdiction
or (2) the application of the laws of the chosen jurisdiction would offend the public policy
of this State.” Manville Personal Injury Settlement Trust v. Blankenship, 231 W.Va. 637,
644, 749 S.E.2d 329, 336 (2013). The majority ignores the presumptive validity of this
choice of law provision and merely states that it applies West Virginia’s substantive contract
law because it is similar to that in Ohio.
The significance of this “oversight” is overwhelming. Schumacher states that
the mechanic’s lien exclusion in the arbitration agreement is entirely in conformity with Ohio
law. As such, the majority’s lone basis for the conclusion that the agreement was
unconscionable is Schumacher’s incorporation of a term required under Ohio law, which law
it expressly elected under its choice of law provision.
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and expressly acknowledged by placing their initials in the margin of the contract where the
arbitration agreement appears. The plainly-written arbitration agreement provides:
The Parties agree that any claim, dispute or cause of action, of
any nature, including but not limited to, those arising in tort,
contract, statute, equity, law, fraud, intentional tort, breach of
statute, ordinance, regulation, code, or other law, or by gross or
reckless negligence, arising out of or related to, the negotiations
of the Contract Documents, the Home, the Property, materials
or services provided to the Home or Property, the performance
or non-performance of the Contract Documents or interaction of
Homeowner(s) and Schumacher or its agents or subcontractors,
shall be subject to final and binding arbitration by an arbitrator
appointed by the American Arbitration Association in
accordance with the Construction Industry Rules of the
American Arbitration Association and judgment may be entered
on the award in a court of appropriate venue. . . . The
arbitrator(s) shall determine all issues regarding the
arbitrability of the dispute. . . .
(emphasis added).
Notwithstanding their clear agreement to arbitrate, the Spencers filed a civil
action in the circuit court against Schumacher alleging defects in their home. In reliance
upon the plain language of the arbitration agreement, Schumacher filed a motion to dismiss
the complaint and to compel arbitration. In response, the Spencers challenged the validity
of the arbitration agreement, arguing that it was unconscionable. During the hearing held
before the circuit court on Schumacher’s motion, and in response to the Spencers submitting
to the circuit court the issue of whether the claim was subject to the arbitration agreement,
Schumacher raised the “delegation provision” within the arbitration agreement, which
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provides that issues of arbitrability, i.e., whether the claim is subject to arbitration, must
likewise be decided by the arbitrator. Without so much as acknowledging the existence of
the delegation provision, which clearly stripped the circuit court of the authority to decide
the issue placed before it by the Spencers, the circuit court concluded that the arbitration
agreement as a whole was unconscionable and, therefore, unenforceable.
While the majority devotes nearly all of its opinion to this delegation
provision,3 it ultimately misinterprets and invalidates this provision, straining to find one
word within–“arbitrability”– to be ambiguous in its headlong march toward its ultimate goal
of relieving the Spencers of their contractual obligation to arbitrate their claims. The United
States Supreme Court has stated that “unless [the party opposing arbitration] challenge[s] the
delegation provision specifically, we must treat it as valid under [9 U.S.C.] § 2, and must
enforce it under [9 U.S.C.] §§ 3 and 4, leaving any challenge to the validity of the Agreement
as a whole for the arbitrator.” Rent-A-Center, Inc. v. Jackson, 561 U.S. 63, 72 (2010). This
Supreme Court precedent instructs that once parties empower the arbitrator to decide
arbitrability through a delegation provision, the only challenge left for a court to decide is the
validity of a delegation clause itself, but only when that provision is specifically challenged
by the party opposing arbitration. Id.
3
Indeed, it is the only substantive analysis within the majority opinion. As previously
indicated, the majority pays little more than lip service to the other issues in this matter,
collapsing them into a single footnote without any analysis of the law or the facts pertinent
to those issues.
5
Here, however, the Spencers did not do so—either in their complaint, during
the hearing on Schumacher’s motion to compel arbitration, or even before this Court.4
Ironically, the majority attempts to chastise Schumacher for failing to raise the delegation
provision in its initial motion to compel arbitration. However, as illustrated above in the
procedural summary, there was simply no reason to do so at that juncture. Schumacher’s
initial motion to compel arbitration was based on the plain, unopposed (at that time) language
of the arbitration agreement. Once the Spencers responded, seeking to place the issue of
enforceability in front of the circuit court, the delegation provision became pertinent and was
properly relied upon by Schumacher during oral argument before the circuit court.
As to the majority’s purported “analysis,” which concludes that the term
“arbitrability” is too vague to be enforced, the majority relies upon dicta in a single California
4
If the Spencers’ counsel was not prepared to challenge the validity of the delegation
provision during the hearing held before the circuit court, counsel could easily have asked
the circuit court for a brief continuance for the purpose of considering such a challenge. The
hearing transcript in the appendix record reflects that not only did the Spencers’ counsel fail
to make such a request, counsel dove head first into his procedural and substantive
unconscionability arguments regarding the arbitration agreement, as a whole, completely
ignoring Schumacher’s arguments concerning the “delegation provision.” The circuit court
echoed the unconscionability arguments of the Spencers’ counsel in its order denying
Schumacher’s motion to compel arbitration, likewise failing to address in any fashion the
delegation provision in the parties arbitration agreement.
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Court of Appeals case5 to conclude that this “nebulous” term does not reflect a clear and
unmistakable intent of the parties to confer upon the arbitrator “the gateway questions
regarding the validity, revocability, and enforceability” of their arbitration agreement.
However, the United States Supreme Court has utilized that precise term itself, stating that
“parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the
parties have agreed to arbitrate or whether their agreement covers a particular controversy.
Rent-a-Center, Inc., 561 U.S. at 68-69 (emphasis added). The Supreme Court further
explained that “‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability
unless there is “clea[r] and unmistakabl[e]” evidence that they did so.’” Rent-a-Center, Inc.,
561 U.S. at 69 n.1, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995))
(emphasis added). Clearly, the United States Supreme Court does not find the word
“arbitrability” to be nebulous and, unlike this majority, understands that it simply means
“subject to or susceptible to arbitration.”
Contrary to the majority’s position, the parties’ delegation provision clearly
and unmistakably entails the “‘gateway’ question[] of . . . whether the parties have agreed
to arbitrate ‘arbitrability of the dispute[.]’” Rent-a-Center, Inc., 561 U.S. at 68-69. The
arbitration agreement, which the Spencers initialed, clearly states: “The arbitrator(s) shall
determine all issues regarding the arbitrability of the dispute.” Other courts have interpreted
5
Brunt v. Didion, Bruni v. Didion, 73 Cal. Rptr. 3d 395 (Cal. Ct. App. 2008).
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similar succinct language to evidence a clear and unmistakable intent of parties to delegate
the arbitrability decision to an arbitrator and none have found it to be so incapable of
comprehension as to render it unenforceable. See Sadler v. Green Tree Servicing, LLC, 466
F.3d 623, 624 (8th Cir.2006) (finding provision that “[a]ny controversy concerning whether
an issue is arbitrable shall be determined by the arbitrator(s)[]” was clear and unmistakable);
Muigai v. IMC Const., Inc., No. PJM 10–1119, 2011 WL 1743287, *4 (D. Md. May 6, 2011)
(recognizing that question of arbitrability is issue for judicial determination unless parties
clearly and unmistakably provide otherwise and finding that delegation provision stating that
“the Arbitrator(s) shall have the exclusive power to determine issues of arbitrabilty[]”
evidenced parties’ intent to submit arbitrability decision to arbitrator). It is, in fact, difficult
to discern a single term, phrase, or description of the issues encompassed in the term
“arbitrability” that better or more clearly describes those issues than the word “arbitrability”
itself.
In addition to the subject delegation provision discussed above, I observe that
the parties have included a second delegation provision through their incorporation of the
“Construction Industry Rules of the American Arbitration Association” into their arbitration
agreement. See Malone v. Superior Court, 173 Cal. Rptr. 3d 241, 245 (Cal. Ct. App. 2014)
(finding second delegation clause was incorporated into arbitration agreement by reference
to applicable American Arbitration Association rules which provide that “‘[t]he arbitrator
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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.”). Although not
specifically argued by Schumacher, as seen below, a vast majority of courts have found that
the inclusion of American Arbitration Association (“AAA”) rules evidences a clear and
unmistakable delegation of the question of arbitrability to the arbitrator.
In Fadal Machining Centers, LLC v. Compumachine, Inc., 461 F.App’x 630
(9th Cir. 2011), the United States Court of Appeals for the Ninth Circuit addressed a
challenge to the district court’s conclusion that the arbitration clause in the parties’ contract
clearly established an agreement to submit all disputes, including the question of arbitrability,
to an arbitrator. Relying upon the arbitration clause’s incorporation of “the AAA’s
Commercial Arbitration Rules, which provide that ‘[t]he 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[,]’” the appellate court concluded that “the
arbitration clause clearly and unmistakably delegated the question of arbitrability to the
arbitrator.” Id. at 632. See also Contec Corp. v. Remote Solution, Co., Ltd., 398 F.3d 205,
208 (2d Cir. 2005) (recognizing its prior holding that “when . . . 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
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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 America, 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. Partnership, 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, No. 12-749, 2013 WL 751035 at *5 (D.D.C. Cir. Feb. 28,
2013) (holding that incorporation of AAA Commercial 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”); Yellow Cab Affiliation, Inc. v. New Hampshire Insur. Co., No. 10cv6896, 2011
WL 307617 at *4-5 (N.D. Ill. Jan. 28, 2011) (finding that “by specifically incorporating the
Commercial Arbitration Rules of the American Arbitration Association into their agreement,
the parties clearly and unmistakably evidenced their intention to grant the arbitrator the
authority to determine whether their dispute is arbitrable.”); GHA Technologies Inc. v.
McVey, No. 1 CA-SA 11-0304, 2012 WL 209024 at *2 (Ariz. Ct. App. Jan. 24, 2012)
(finding that delegation of authority to arbitrator may be express or implied and citing other
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authority for proposition that parties’ agreement to adhere to AAA rules evidenced their
agreement that arbitrator would decide validity of arbitration agreement); In re Application
of R D Management Corp., 766 N.Y.S.2d 304 (N.Y. Sup. 2003) (recognizing that express
agreements to proceed under AAA rules, which grant arbitrator power to decide scope of
arbitration clause, have been construed as delegation of issue of arbitrability to arbitrator and
finding that any questions regarding arbitrability must be resolved by arbitration panel).
Accordingly, in addition to the specific delegation provision relied upon by Schumacher, the
foregoing line of cases further compels the conclusion that the parties clearly and
unmistakably delegated the question of arbitrability to an arbitrator through their
incorporation of the AAA rules into their arbitration agreement.
The benefits of arbitration are clear and widely recognized. As one court has
explained:
Parties agree to arbitrate to secure “streamlined proceedings and
expeditious results [that] will best serve their needs.” The
arbitration of disputes enables parties to avoid the costs
associated with pursuing a judicial resolution of their
grievances. . . . Further, the adversarial nature of litigation
diminishes the possibility that the parties will be able to salvage
their relationship. For these reasons parties agree to arbitrate and
trade “the procedures and opportunity for review of the
courtroom for the simplicity, informality, and expedition of
arbitration.”
Hooters of America, Inc. v. Phillips, 173 F.3d 933, 936 (4th Cir. 1999) (internal citations
omitted). This Court has been notoriously chastised by the United States Supreme Court for
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its failure to uphold valid arbitration agreements and ensure that such agreements are not
“singled out” for hostile treatment or disfavor. See Marmet Health Care Center v. Brown,
132 S. Ct. 1201 (2012). The majority’s opinion does little to convey that the United States
Supreme Court’s message was received; in fact, such tortured “analysis” certainly suggests
that a majority of this Court took little heed of it.
Accordingly, I respectfully dissent.
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