Dialysis Access Center, LLC, et al. (DAC) v. RMS Lifeline, Inc. (RMS), No. 10-1872 (1st Cir. Mar. 2011), includes a step-by-step refresher of the current state of the law on when in international litigation an arbitration clause can force a party to present validity and enforceability issues to the arbitrator rather than to a court.  The case contains a hair-splitting ruling of interest to corporate lawyers drafting arbitration provisions and so deserves an extended summary here.  See generally our discussion of the issue of who decides what in the arbitration-litigation context in our e-book, International Practice: Topics and Trends

DAC and RMS entered into a management services agreement (MSA) for the development, building, management, and operation of a vascular access center in Puerto Rico. The contract included a Puerto Rico choice of law provision and an arbitration clause containing an obligation to use good faith to resolve a dispute and a binding arbitration provision for any “dispute that may arise under this Agreement”. DAC alleged that the formation of the MSA was infected with fraud and that it was fraudulently induced to enter into the MSA.

The First Circuit handled this fairly typical fact pattern as follows:

First, because the District Court not only ruled that the fraudulent inducement claims were arbitrable but also dismissed (rather than stayed) the case, the Court of Appeals found that it had appellate jurisdiction under Section 16 of the Federal Arbitration Act for “final decisions”.

Second, the Court of Appeals followed the U.S. Supreme Court’s decision in Granite Rock Co. v. Int’l Bhd. of Teamsters, 130 S.Ct. 2847 (2010), that “except 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”.

Third, the Court of Appeals followed the U.S. Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), that “procedural” questions which grow out of the dispute and bear on its final disposition’ are presumptively not for the judge, but for an arbitrator, to decide”.  All this is known and settled.

Fourth, the First Circuit then grappled with the role of presumptions, or the “federal policy favoring arbitration”, as to which the Supreme Court has stated that “due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.” Mastrobuono v.Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 476 (1989)). That federal policy came under attack – or at least under scrutiny — in Granite Rock, which has been read to reapply a strict constructionist patina over arbitrability questions. The First Circuit reads Granite Rock as clarifying the presumption, where courts “discharge this duty by: (1) applying the presumption of 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”.  It also embraced the “positive assurance” phraseology that: “In evaluating the scope of . . . arbitration clauses, . . . arbitration will be ordered unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute”.

Fifth, in applying these general principles to a claim for fraud in the inducement to an arbitration clause requiring arbitration not of any dispute “arising under or relating to” the agreement but only “arising under” the agreement, the Court of Appeals joins the other Circuits limiting to its facts (a polite way of saying refused to follow) In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir. 1961), where the Second Circuit found that where an arbitration clause “refers to disputes or controversies ‘under’ or ‘arising out of’ the contract,” arbitration is restricted to “disputes and controversies relating to the interpretation of the contract and matters of performance” and not to the issue of its formation or enforceability. The First Circuit noted In re Kinoshita’s “inconsistency with federal policy favoring arbitration, particularly in international business disputes”. But the way it found arbitration of the fraudulent inducement claim arbitrable in the case before it — despite the narrow arbitration clause and despite Puerto Rico law that fraudulently induced contracts were null — was by finding the “arising under” language ambiguous – and then applying the federal policy favoring arbitration. In doing so the Court of Appeals had to distinguish Granite Rock itself, which held that an arbitration clause requiring arbitration of disputes arising under a collective bargaining agreement was not broad enough to encompass the dispute over the date of ratification of the CBA itself. The distinction the First Circuit drew was the that the “parties here do not dispute the MSA’s existence. Rather, they dispute the validity of the MSA”.

Finally, the Court of Appeals held that the controversy over whether the good-faith negotiation condition was met was an issue for the arbitrator to decide.