In Massachusetts, judge finds court filings negate arbitration agreement

Arbitration clauses are designed to ensure a case goes to an arbitrator, not court. This case questions what happens when a company attempts to have a case thrown out in court, fails and attempts to move the case into arbitration

Arbitration is designed to provide an alternative to a traditional lawsuit. Instead of filing suit and going to court, those parties who agree to arbitrate generally present their case in front of a panel of arbitrators or an arbitrator. During this presentation, evidence, expert testimony and other information is provided to the arbitrator(s). Similar to a court of law, the arbitrator delivers a ruling based on the record presented. This process is viewed as beneficial by many companies because it is generally less time consuming and less expensive than litigation. As a result, it is included in many commercial contracts, including employment contracts.

An arbitration provision put to the test: Background

Frequently, following the development of a legal dispute, a party challenges the enforceability of the particular arbitration provision, particularly in the employment context. One of the more recent examples involved a woman, Dr. Nadia Shalaby, who served as CEO for Arctic Sand Technologies, Inc.

Dr. Shalaby was fired and the company repurchased her stock. In response, the former CEO filed nine claims against the company based on the legality of the termination and repurchasing of her stock in the company. The company countered by filing a motion to dismiss the claims with the court. Five of the nine claims were dismissed. Upon realization that not all of the claims were dismissed, the company then moved to compel arbitration of the remaining legal issues.

An arbitration provision put to the test: Law

Various laws apply when arbitration clauses are tested. The Federal Arbitration Act provides that courts must determine whether or not the arbitration clause is waived when a party participates in a civil action that involves the same legal issue. Massachusetts law is in agreement, stating that the threshold issue must be determined by the judge, not an arbitrator. As a result, whether or not the arbitration clause was ultimately waived was reserved for the court's determination

Massachusetts Lawyers Weekly published an article discussing the case, explaining that since the company made use of the traditional court system for six months in an attempt to avoid arbitration, it could no longer compel arbitration after the motion to dismiss was denied in part. Instead, Judge Kenneth W. Salinger who presided over the case wrote:

The court finds that Arctic Sand waived any contractual right to arbitrate Dr. Shalaby's claims by deliberately waiting six months before seeking to compel arbitration, and by actively litigating the case in Superior Court in the meantime.

Critics of the ruling have stated that it is important to retain the option to have legal issues dismissed in court before financing arbitration proceedings without the risk of negating arbitration agreements. However, the judge states that an "extensive and exhaustive" motion to dismiss invokes the "litigation machinery" of the court. Once this machinery has been put into motion, the court found that it is unfair to remove the case and arbitrate with hopes of a more favorable outcome.

An arbitration provision put to the test: Lessons

Although this most recent case limits the effectiveness of arbitration provisions under some circumstances, there is no clear rule. In a similar case in 2013, the U.S. District Court ruled to uphold the arbitration provision, even though there had been sporadic court filings. In short, a party may be able to preserve its right to compel arbitration while submitting limited filings to the court, but the party must be prudent and cautious in doing so. For instance, a party could file a motion to dismiss and expressly state that any remaining counts will be arbitrated pursuant to the applicable arbitration provision. In this way, the other side and the court are on notice of your clear intentions. They may belie a potential argument of waiver.

At the end of the day, the real lesson is one must be prudent and cautious with court filings in order to ensure that the party has not undermined the enforceability of the arbitration clause. The commercial litigation group at ABP can assist you with any questions in this area of litigation.