Arbitration clauses have become a common component of many types of contracts. When parties enter into a contract that contains such a clause, in effect, the parties are agreeing to submit any dispute that may arise between them to arbitration instead of the court system. The United States Court of Appeals for the Eighth Circuit’s opinion in Webb v. Farmers of North America, Inc., shows that parties may not have immediate recourse when they disagree on what such a clause means.
The Facts and the Lawsuit
The Plaintiff, James Webb, sued the Defendant, Farmers of North America, Inc., for an alleged breach of an employment contract. The employment contract contained an arbitration clause that stated that disputes are to be submitted to arbitration. On Farmer’s motion, a federal district court ordered that the parties must submit the employment dispute to arbitration in accordance with the employment contract.
The arbitration clause contained in the employment contract stated that arbitration was to be governed by the rules of the American Arbitration Association (AAA). According to Farmers, the reference to the AAA’s rules also meant that AAA was to be the arbitrator. Webb disagreed, and maintained that, while the AAA’s rules applied, the employment contract did not select who the arbitrator would be.
Webb then submitted the question to the district court for clarification. The district court agreed with Webb and ruled that if Farmers intended for disputes to be arbitrated by AAA then the employment contract should have said so. The district court ordered the parties “to work together to find a mutually acceptable arbitrator.
Farmers then filed an interlocutory appeal – that is, an appeal before the case is fully resolved in the district court–with the Eighth Circuit seeking to have the district court’s ruling overturned.
Rather than take up the merits of the dispute, the Eighth Circuit decided whether it had jurisdiction over the appeal. In support of jurisdiction, Farmers argued that (1) the district court’s order compelling arbitration was a final order that could be appealed to the Eighth Circuit, (2) that “the district court’s denial of Farmers’ petition to arbitrate pursuant to the parties’ agreement creates jurisdiction . . .”, and (3) the collateral order doctrine supplied the Eighth Circuit with jurisdiction. The Eighth Circuit rejected all three bases.
First, the Eighth Circuit ruled “that a ‘final decision with respect to an arbitration’ . . . is ‘a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.’” According to the Eighth Circuit, the district court’s order compelling arbitration stayed the proceedings in federal court; it did not dismiss the case, and issues remained for the district court even after arbitration concluded. Therefore, the decision was not final and could not be appealed
Second, the Eighth Circuit rejected Farmers’ alternative argument that the “‘district court denied the petition to arbitration pursuant to the parties’ agreement, i.e., their agreed method of selecting an arbitrator.’” According to the Eighth Circuit, the district court did not deny a petition to arbitrate; in fact, it did the opposite and ordered that arbitration be conducted in accordance with AAA rules. The Eighth Circuit stated that it did not have jurisdiction over the interlocutory appeal in the absence of an order from the district court denying arbitration.
Finally, the Eighth Circuit stated that the collateral order doctrine did not confer jurisdiction. “The collateral order doctrine confers appellate jurisdiction to review interlocutory ‘decisions which finally determine claims of right separate from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate jurisdiction be deferred until the whole case is adjudicated.’” For the “narrow doctrine” to apply, among other things, Farmers had to show that the order of the district court was “‘effectively unreviewable on appeal from a final judgment.’” To be “effectively unreviewable,” it must be shown that the asserted right would be destroyed if the party asserting the right was forced to wait for a final resolution.
According to the Eighth Circuit, Farmers’ asserted right would not be destroyed if it were forced to arbitrate in the way ordered by the district court. “If Farmers is dissatisfied with the final result of arbitration and an order confirming that award by the district court, it would at that time have an appropriate remedy to seek review on appeal. . . .”
Agreeing to arbitration can be an effective and inexpensive way to resolve disputes quickly. As is shown by Webb v. Farmers of North America, Inc., however, simply referring to certain rules of arbitration is likely not effective to also select the arbitrator, and there may not be any immediate recourse. Therefore, the arbitration clause should be drafted to make the terms of arbitration clear in the first instance.