Arbitration Required Despite Party’s Right to Seek Injunctive Relief in Court

On July 20, 2022, an Illinois federal court held that clauses permitting parties to go to court to seek injunctive relief do not limit an arbitrator’s authority to decide questions of arbitrability when the parties have clearly and unmistakably agreed to delegate such questions to the arbitrator. Telephone Investments USA, Inc. v. Lumen Technologies, Inc., No. 22-cv-2260 (N.D. Ill. 2022).

Facts

In 1999, Telephone Investments USA (Investments), partnered with Lumen Technologies (Lumen), and two individual investors to form Telephone USA of Wisconsin, LLC (Telephone USA). The ownership group formed a holding company, TelUSA Holdings, LLC, to be the owner of Telephone USA. This newly formed holding company subjected both parties to a new operating agreement that included an arbitration provision stating that:

Subject to paragraph (b), any and all controversies or claims arising out of or relating to this Agreement, or the interpretation or enforcement thereof, shall be settled by arbitration . . . in accordance with the Commercial Arbitration Rules of the American Arbitration Association.

Paragraph (b) stated:

Notwithstanding the terms of the foregoing paragraph, any party facing irreparable harm shall be entitled to seek injunctive and other forms of equitable relief from any court of competent jurisdiction (whether during the pendency of any arbitration proceedings or otherwise) to prevent nonperformance or breach of one or more agreements or covenants set forth herein, and to enforce specifically the terms and provisions hereof . . .

Despite the agreement’s arbitration provision, Investments filed a complaint in Illinois federal court alleging that Lumen breached the agreement by giving inadequate notice and causing Investment’s right of first refusal to expire. Lumen then moved to compel arbitration and to dismiss or stay Investment’s suit. Investment amended its complaint and maintained its request for injunctive relief.

Lumen moved to dismiss or stay the action and to compel Investment to arbitrate its claims. Investment argued that the “carve-out” provision in “paragraph b” of the arbitration clause entitles it to seek injunctive relief through the courts.

Legal Analysis

The district court held, as a preliminary matter, that the parties had agreed to delegate arbitrability to the arbitrator. The court noted that the arbitration provision delegates “any and all controversies or claims arising out of” and “the interpretation or enforcement thereof” to the arbitrator. Additionally, the court explained that the agreement’s incorporation of the American Arbitration Association rules expressly gave the arbitrator the right to determine their own jurisdiction. Thus, the court found that there was “clear and unmistakable evidence” that the parties agreed to delegate questions of arbitrability to the arbitrator, not the courts.

The court also held that the so-called “carve-out provision” in paragraph b of the arbitration agreement did not limit the jurisdictional authority of the arbitrator. The court reasoned that the agreement’s “carve-out clause” did not exempt claims for injunctive relief from arbitration but merely provided that parties facing irreparable harm “shall be entitled” to seek equitable relief in the courts. The court had already rejected Investment’s request for such equitable relief. Accordingly, the court granted Lumen’s motion to compel arbitration and stayed the lawsuit until the arbitration was resolved.