Pro Tech Industries v. URS Corporation

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-3329
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Pro Tech Industries, Inc., d/b/a Fusion
*
Seal Corporation, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the Eastern
* District of Missouri.
URS Corporation, d/b/a URS Group, *
Inc.; American Home Assurance *
Company, *
*
Appellees. *
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Submitted: April 13, 2004
Filed: July 27, 2004
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Before MORRIS SHEPPARD ARNOLD, RILEY, and COLLOTON, Circuit
Judges.
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RILEY, Circuit Judge.
This appeal asks whether the parties should be compelled to arbitrate a dispute.
The parties clearly agreed to arbitrate, and the dispute falls squarely within their
broad arbitration agreement. However, Pro Tech Industries, Inc. (Pro Tech) contends
the agreement to arbitrate is unenforceable because (1) URS Corporation (URS)
failed to make a required demand for arbitration of Pro Tech’s claims, and URS
thereby waived its right to arbitrate, and (2) Pro Tech cannot now afford to arbitrate,
rendering the arbitration agreement unconscionable.1 The district court2 compelled
arbitration and dismissed the lawsuit. Because the issue of waiver is for the arbitrator
to decide and because the issue whether Pro Tech can afford the cost of arbitration
is “speculative,” we affirm, adhering to the strong federal policy favoring arbitration,
see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985), and Federal
Arbitration Act, 9 U.S.C. §§ 1-16.
I. BACKGROUND
In December 2001, Pro Tech, a Missouri corporation, agreed to provide URS,
a Texas corporation, with pipe, pipe fittings, pipe fusion, and leak testing for an
environmental reclamation facility being built at the White Sands Test Facility
operated by NASA (White Sands project). URS was the general contractor on the
White Sands project, let bids for the pipe work, selected Pro Tech for the work, and
negotiated with Pro Tech.
The parties memorialized the terms of this joint undertaking in a written
agreement (Agreement). Under the Agreement, URS and Pro Tech agreed to arbitrate
“[a]ll claims, disputes and other matters . . . arising out of, or relating to” the
Agreement. A choice-of-law provision, included in twelve-point bold-face type,
specified that the subcontract agreement “shall be interpreted, construed and
governed under the laws of . . . Texas.” In the event of a dispute, the Agreement
1
Pro Tech’s notice of appeal suggests it is appealing the decision of the district
court dismissing without prejudice Pro Tech’s claims against American Home
Assurance Company. Pro Tech failed to raise this claim in their initial brief before
this court. “Claims not raised in an initial brief are waived, and we generally do not
consider issues raised for the first time on appeal in a reply brief.” Mahaney v.
Warren County, 206 F.3d 770, 771 n.2 (8th Cir. 2000) (citation omitted). We see no
reason to depart from our rules in this case.
2
The Honorable Rodney W. Sippel, United States District Judge for the Eastern
District of Missouri.
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mandates “[n]otice of demand for arbitration shall be filed in writing with the other
party to [the] Agreement in accordance with the rules of the American Arbitration
Association.”
In July 2002, a dispute arose, ultimately leading URS to invoke the arbitration
provision. The dispute stemmed from Pro Tech removing its equipment and
personnel from the White Sands project and ceasing to provide any further services,
notwithstanding substantial work remaining under the Agreement. This occurred
despite URS having paid Pro Tech in excess of $424,000 of the $471,071 total
contract price. In November 2002, Pro Tech filed an action in Missouri state court,
claiming (1) URS owed Pro Tech money under the Agreement; (2) Pro Tech was
entitled to additional compensation for performing extra work not included in the
Agreement; and (3) URS coerced Pro Tech into providing this extra work. Pro Tech
sought compensatory damages in excess of $200,000 and punitive damages in excess
of $2,000,000. URS removed the case to the federal district court on diversity
grounds.
URS moved to dismiss and to compel arbitration, citing the Agreement’s
arbitration provision. The district court held the arbitration provision was enforceable
and Pro Tech’s claims against URS were subject to that arbitration provision. The
court granted URS’s motion to compel arbitration, but refused to dismiss Pro Tech’s
claims. Instead, the district court stayed the case, pending the outcome of arbitration.
The district court advised the parties that, if neither party initiated arbitration within
thirty days of the court’s order, the court would deem that failure to be a novation of
the contract and a waiver of the right to arbitrate.
Within thirty days of the district court’s order, URS served its demand for
arbitration on Pro Tech and filed the demand with the American Arbitration
Association (AAA). The demand asserted a claim by URS against Pro Tech and
requested that Pro Tech pursue any claims against URS in arbitration. Pro Tech
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subsequently moved to vacate the district court’s order asserting URS’s demand was
not sufficient to initiate arbitration of Pro Tech’s claims, and URS had therefore
waived its right to arbitrate those claims. Pro Tech also moved to bar arbitration of
all claims, contending it did not have the financial resources to participate in
arbitration. Because of this alleged poverty, Pro Tech asked the district court to
declare the arbitration provision unconscionable.
The district court denied Pro Tech’s motion to vacate, concluding URS had not
waived its right to arbitrate Pro Tech’s claims. The district court also denied Pro
Tech’s motion to bar arbitration of all claims, concluding the costs did not render the
Agreement unconscionable. The district court dismissed Pro Tech’s claims, holding
the parties’ dispute must be resolved by arbitration pursuant to the Agreement’s
arbitration provision. Pro Tech appeals.
Pro Tech presents three reasons why it should not be forced to arbitrate its
claims against URS: (1) URS waived its right to compel arbitration; (2) URS’s
demand for arbitration was insufficient; and (3) the arbitration provision is
unenforceable, because Pro Tech cannot now afford arbitration. We first ask whether
these contentions are “gateway matters” that courts, not arbitrators, must decide.
Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, ___, 123 S. Ct. 2402, 2407 (2003)
(holding courts must decide “certain gateway matters, such as whether the parties
have a valid arbitration agreement at all or whether a concededly binding arbitration
clause applies to a certain type of controversy”).
II. DISCUSSION
We review de novo the district court’s decision to compel arbitration. See
Keymer v. Mgt. Recruiters Int’l., Inc., 169 F.3d 501, 504 (8th Cir. 1999). “Factual
findings are reviewed for clear error.” Faber v. Menard, Inc., 367 F.3d 1048, 1051
(8th Cir. 2004) (quoting Dobbins v. Hawk’s Enters., 198 F.3d 715, 717 (8th Cir.
1999)). We recognize an agreement to arbitrate is a matter of contract, and “is a way
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to resolve those disputes–but only those disputes–that the parties have agreed to
submit to arbitration.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943
(1995).
As with any contract dispute, we first look to the express terms, which require
Pro Tech and URS to arbitrate “[a]ll claims, disputes and other matters in question
between the parties to this agreement arising out of, or relating to” the contract. The
Agreement sets forth specific procedures governing the initiation of arbitration, and
the manner in which it is conducted, and provides that the resulting decision “shall
be final.” These express terms unambiguously reflect the parties’ intent both to
arbitrate disputes arising from the Agreement and to be bound by the arbitration
decisions resolving such disputes. It is against this backdrop that we turn to the
governing provisions of the Federal Arbitration Act (FAA).
A. Federal Arbitration Act
Because the Agreement is “a contract evidencing a transaction involving
commerce,” it is subject to the FAA. 9 U.S.C. § 2. The FAA provides that any
arbitration agreement within its scope “shall be valid, irrevocable, and enforceable.”
Id. The FAA permits “[a] party aggrieved by the alleged . . . refusal of another to
arbitrate” to petition any federal district court for an order compelling arbitration. Id.
§ 4. By its terms, the FAA “leaves no place for the exercise of discretion by a district
court, but instead mandates that district courts shall direct the parties to proceed to
arbitration on issues as to which an arbitration agreement has been signed.” Dean
Witter, 470 U.S. at 218. A court’s role under the FAA is therefore limited to
determining (1) whether a valid agreement to arbitrate exists and, if it does, (2)
whether the agreement encompasses the dispute. Gannon v. Circuit City Stores, Inc.,
262 F.3d 677, 680 (8th Cir. 2001). The parties do not dispute Pro Tech’s claims fall
within the scope of the arbitration provision. If the response is also affirmative on the
other question, then the FAA requires the court to enforce the arbitration provision
in accordance with its terms.
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B. Waiver and Timely Demand
“[W]hether the parties have submitted a particular dispute to arbitration, i.e.,
the ‘question of arbitrability,’ is ‘an issue for judicial determination [u]nless the
parties clearly and unmistakably provide otherwise.’” Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 83 (2002) (quoting AT&T Tech., Inc. v.
Communications Workers of Am., 475 U.S. 643, 649 (1986)) (second alteration in
original); see First Options, 514 U.S. at 944. We must decide whether Pro Tech’s
allegations of waiver and insufficient and untimely demand, are questions of
arbitrability.
“[T]he presumption is that the arbitrator should decide ‘allegation[s] of waiver,
delay, or a like defense to arbitrability.’” Howsam, 537 U.S. at 84 (quoting Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)) (second
alteration in original). Indeed, “in the absence of an agreement to the contrary, issues
of substantive arbitrability . . . are for a court to decide and issues of procedural
arbitrability, i.e., whether prerequisites such as time limits, notice, laches, estoppel,
and other conditions precedent to an obligation to arbitrate have been met, are for the
arbitrators to decide.” Howsam, 537 U.S. at 85 (citations omitted).
Following this precedent, we conclude questions of whether waiver occurred
and whether demand was sufficient and timely under the agreement, involve issues
of procedural arbitrability, matters presumptively for the arbitrator, not for the judge.
See Int’l. Ass’n of Bridge, Structural, Ornamental, & Reinforcing Ironworkers, Local
493 v. EFCO Corp. & Constr. Prods., Inc., 359 F.3d 954, 957 (8th Cir. 2004) (noting
“the question of whether the procedural prerequisites have been complied with or . . .
waived . . . is a matter for the arbitrator and not for the court”); Dominium Austin
Partners, LLC v. Emerson, 248 F.3d 720, 728 (8th Cir. 2001) (ruling issue of waiver
of arbitration because of untimely demand is for arbitration); Contracting Northwest,
Inc. v. City of Fredricksburg, 713 F.2d 382, 386 (8th Cir. 1983) (ruling the court
would not entertain an objection that opposing party failed to deliver an arbitration
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demand within time limit); Auto., Petro. & Allied Indus. Employees Union, Local No.
618 v. Town & Country Ford, Inc., 709 F.2d 509, 514 (8th Cir. 1983) (stating “the
issue of whether the Union’s alleged failure to satisfy the notice requirement barred
arbitration is one of procedural arbitrability,” and “is reserved for the arbitrator, and
not the district court”).
Furthermore, arbitrators are the experts about the meaning of their own rules,
and are comparatively better able to interpret and to apply them than courts. In the
absence of any contrary statement in the arbitration provision, it is reasonable to infer
that the parties intended the provision to reflect that understanding. See Howsam,
537 U.S. at 85 (“for the law to assume an expectation that aligns (1) decisionmaker
with (2) comparative expertise will help better to secure a fair and expeditious
resolution of the underlying controversy–a goal of arbitration systems and judicial
systems alike”).
Accordingly, we conclude Pro Tech’s allegations of waiver and insufficient
demand fall within the class of gateway procedural disputes that do not present
“questions of arbitrability” this court should decide.
C. Unconscionability
Having decided the above gateway arbitrability issues against Pro Tech, we
turn to Pro Tech’s next contention, that the arbitration provision should not be
enforced because Pro Tech cannot now afford the costs of arbitration, thereby
rendering the provision unconscionable. Generally, when deciding whether an
arbitration provision is unconscionable, courts apply ordinary state-law principles
governing the formation of contracts. First Options, 514 U.S. at 944; see 9 U.S.C. §
2 (agreements are valid unless grounds “exist at law or in equity for the revocation
of any contract”). The parties do not dispute that Texas law governs, pointing to the
Agreement’s choice-of-law provision. Accordingly, we look to Texas state law to
determine whether the arbitration provision here is unconscionable. See Volt Info.
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Sci., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 477
(1989).
Under Texas law, the doctrine of unconscionability can be applied to
arbitration provisions in the same manner as it applies to other contracts. See In re
FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001). A reviewing court must
independently evaluate the law and address the unconscionability issue “on a
case-by-case basis, looking to the entire atmosphere in which the agreement was
made.” Pearce v. Pearce, 824 S.W.2d 195, 199 (Tex. Ct. App. 1991); see Dobbins,
198 F.3d at 717. “[T]he basic test for unconscionability is whether, given the parties’
general commercial background and the commercial needs of the particular trade or
case, the clause involved is so one-sided that it is unconscionable under the
circumstances existing when the parties made the contract.” FirstMerit, 52 S.W.3d
at 757. The purpose of the unconscionability doctrine is not to disturb the allocation
of risks because of superior bargaining power, but to prevent oppression and unfair
surprise. Id. Although the term “unconscionable” generally “describes a contract
that is unfair because of its overall one-sidedness or the gross one-sidedness of its
terms,” Texas “courts will not protect ‘a party who knowingly enters a lawful but
improvident contract.’” In re Marriage of Smith, 115 S.W.3d 126, 135 (Tex. Ct. App.
2003) (citation omitted). “[T]he fact that a bargain is a hard one does not entitle a
party to be relieved therefrom if [the party] assumed it fairly and voluntarily.” Id.
(citation omitted). And the party seeking to avoid the arbitration provision has the
burden of proving an arbitration provision is unconscionable. AutoNation USA Corp.
v. Leroy, 105 S.W.3d 190, 198 (Tex. Ct. App. 2003).
Pro Tech simply cannot carry this burden. Pro Tech claims the arbitration
provision is unconscionable solely because it allegedly cannot afford to pay the fees
invoiced by the AAA. The arbitration provision forcing Pro Tech to arbitrate
potential disputes is not harsh or one-sided. The arbitration provision does not limit
either party’s participation in choosing arbitrators, and provides for application of the
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AAA rules. The arbitration provision does not give URS any greater rights than Pro
Tech, and does not limit Pro Tech’s ability to recover in arbitration. Furthermore, Pro
Tech and URS were both businesses holding themselves out as sophisticated enough
to negotiate a $471,071 government construction contract. Considering the parties’
commercial backgrounds and the Agreement’s terms, the arbitration provision was
not unconscionable at the time the parties made the contract. Applying Texas law,
we conclude the district court did not err in determining the arbitration provision was
not unconscionable.
Pro Tech also contends the prohibitive costs of arbitration present a hardship
and are unconscionable, rendering the arbitration provision unenforceable under
Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000). We disagree. In
Green Tree, the Supreme Court addressed arbitration of federal statutory claims, and
did not analyze the unconscionability of an arbitration agreement under state law. Id.
at 90-92. Under Texas law, we only consider the circumstances at contract formation
to determine if a contract is unconscionable, rendering Pro Tech’s current inability
to afford the costs of arbitration irrelevant to the conscionability determination.
After arbitration, Pro Tech may seek limited judicial review. See 9 U.S.C.
§ 10; First Options, 514 U.S. at 942.
III. CONCLUSION
Accordingly, we affirm the district court’s judgment dismissing the
proceedings and compelling arbitration.
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