Cottrell: Subsequent Transaction Forecloses Arbitral Interpretation of Clause Delegating “All Gateway Disputes”
In 2021, the New Jersey Appellate Division in Cottrell v. Holtzberg, 468 N.J. Super. 59 (App. Div. 2021), denied delegation and arbitration in a nursing home case, despite an arbitration agreement with a delegation clause among the intake papers signed by the patient. The patient was asked (but not required) to sign an arbitration agreement upon her admission. The initial, prefatory paragraph of the agreement indicated that it was “intended to resolve by binding arbitration any dispute (as described below) related to any admission at the Center.” (Emphasis added.) The paragraphs “below” included broad delegation language, requiring “the arbitrator or arbitration panel . . . to ‘resolve all gateway disputes regarding the enforceability, validity, severability and/or interpretation of this Agreement.’” In further defining its extension to “any admission,” the arbitration agreement referred inclusively to “prior stays at the Center,” but its words failed to refer expressly to readmissions—and, of course, the arbitrability issue arose regarding care during a second admission. Upon her readmission, the patient completed new intake forms—but not a new arbitration agreement. The arbitration agreement she had signed at her initial admission had included a “survival” clause, i.e., that it remained valid past the “expiration of this Admission Agreement.”
In considering whether the parties had “mutually assented” (to use the New Jersey terminology) to enter into a contract to arbitrate disputes, the court in Cottrell looked only at the fact that no new arbitration clause had been signed at the time of the patient’s readmission, and not to the “any admission” language or survival clause in the arbitration agreement executed at the first admission. In essence, by disregarding the phrase “any admission,” the court undertook the work that the delegation clause assigned to the arbitrator—to interpret that clause and resolve any ambiguity in the terminology.
Significantly for New Jersey courts, the opinion in Cottrell is published and hence precedential. The opinion raises questions for a range of situations—such as, for example, where terms in a “master agreement” may not be honored in subsequent transactions—and thus counsels careful drafting. (Notably, the New Mexico Court of Appeals, in Pena v. St. Theresa Healthcare & Rehabilitation Center, No. A-1-CA-38207 (N.M. Ct. App. Mar. 2, 2022) (unpublished), disagreed with the result in Cottrell, stating in a footnote that the clause in the initial admission documents required interpretation, a role that the New Mexico court would delegate to the arbitrator.)
Aguirre: Delegation Clause Forecloses Judicial Interpretation of a Subsequent Document Providing for Court Filing of Claims
In a 2022 employment case, the New Jersey Appellate Division came to a more “arbitration-friendly” result. In Aguirre v. Conduent Patient Access Solutions, No. A-3542-20 (N.J. Super. Ct. App. Div. Mar. 28, 2022) (unpublished), the parties at the outset had agreed to a broad, employer-promulgated arbitration agreement that explicitly waived the right to go to court and delegated scope issues to the arbitrator. Subsequently, in accordance with regulations of the New Jersey Commissioner of Labor and Workforce Development, the employer sent the employee a “NJ Pay Equality Notice.” As required by the regulations, the pay equality notice stated that claims under the New Jersey Law Against Discrimination (LAD) could be filed with the Division on Civil Rights or “directly in court,” without mentioning arbitration.
The employee filed suit, alleging claims under the LAD. Based on the pay equality notice, the trial court refused to compel arbitration. The Appellate Division reversed, holding that the arbitrator must determine whether the notice superseded the earlier arbitration agreement, which had “expressly delegated to the arbitrator all questions concerning the scope of what can be arbitrated.”
As in Cottrell, everyone in Aguirre agreed that the arbitration clause was properly “formed.” Oddly, though, the court in Aguirre noted Cottrell but did not discuss whether its focus on the second agreement mandated the same result.
Kantz: Prescient Drafting Dictates the Result
In a decision in an employment case, although not precedential, the Third Circuit in Kantz v. AT&T, Inc., No. 21-1620 (3d Cir. Feb. 10, 2022), held that a general release with an integration clause superseded the parties’ earlier arbitration agreement, which included “termination” issues; the release did not have an arbitration clause, but it did release all claims regarding “termination.” The district court had held that the defendant’s severability argument was inapplicable because the plaintiff was questioning the validity of the agreement to arbitrate (based on the release), and “enforceability, revocability or validity” questions had been reserved in the agreement to a court.
Thus, although the delegation issue was mooted by the terms of the arbitration clause, a question remained: Why did a release negate the parties’ prior arbitration agreement despite severability? The key in Kantz was in the specific “termination” wording of the release—the same wording in the scope language of the arbitration clause. Although the release might have included an arbitration clause or an exemption for termination claims, just as it might have covered all potentially arbitrable claims, it did cover the “termination” claims at issue in the lawsuit (and arbitration clause). The parties’ language led inextricably to the result.
Zirpoli: Enforceability or Existence?
In Zirpoli v. Midland Funding, LLC, 48 F.4th 136 (3d Cir. Sept. 1, 2022), the Third Circuit confronted a different contract issue—a cross between Cottrell and Kantz—that faced delegation head-on. The agreement between the cardholder (Zirpoli) and a bank contained an arbitration clause with a delegation clause. When the cardholder breached his obligations under the card agreement, the bank declared the debt in default and assigned the matter to Midland for collection, an assignment that likely would not be questioned in most states.
Midland sued the cardholder, but it withdrew the complaint when the cardholder decided to fight. The cardholder then brought a putative class action against Midland, alleging violations of consumer protection statutes. Midland moved to compel arbitration, and the cardholder challenged the ability of Midland (the bank’s assignee) to compel arbitration of the statutory claims brought by the cardholder. Although the arbitration clause permitted enforcement by assignees and successors, the cardholder argued that Pennsylvania law made the assignment “invalid.” (Under Pennsylvania law, an assignee apparently required a license to hold this type of loan or permission from the secretary of banking.) The defendant argued that the assignment was for purposes of collecting the debt, so it was a “charged-off” loan, making the statute inapplicable.
Because the cardholder did not challenge the formation of the agreement with the arbitration clause, the issue in Zirpoli was not contract “formation”; instead, it was whether the assignment clause in that agreement could be “invalidated.” For the court to answer that question would be premature, the panel majority said, making any arbitration “pointless.” Whether one can enforce an agreement is different from whether the agreement exists—the question the Third Circuit had addressed in MZM. The panel majority in Zirpoli explained, “We are thus compelled to interpret a challenge to an assignment as one of contract enforceability, not formation,” and enforcement issues (such as fraudulent inducement) can be delegated. The majority recognized this result “may seem counterintuitive.” But the arbitrator must resolve it.
Judge Bibas filed a partial dissent. Agreeing with the district court that the assignment was invalid under Pennsylvania law, Judge Bibas in Zirpoli opined that the preliminary question was whether there was an agreement between the parties, a significant issue because Midland was an assignee and, arguably, not a party to the original arbitration agreement. Judge Bibas concluded that no arbitration agreement had been formed between the cardholder and Midland.
Field: No Supersession of Initial Agreement’s Arbitration Provision by Integration Clause in Subsequent Agreement Lacking an Arbitration Provision
Our final “mind-bender,” Field Intelligence Inc. v. Xylem Dewatering Solutions Inc., 49 F.4th 351 (3d Cir. Sept. 13, 2022), arose in a commercial context. The parties had signed a nondisclosure agreement in 2013 with an arbitration clause. They also signed a services agreement in 2017 with a venue clause, requiring litigation in courts, and a standard integration (merger) clause. When disputes arose, the plaintiff filed suit for breach of the 2017 agreement. Once discovery revealed that the lawsuit might rely on definitional terms in the 2013 agreement, the defendant moved to compel arbitration.
The Third Circuit panel first held that, despite a delegation clause in the 2013 agreement, the court must decide whether the 2017 agreement superseded the 2013 one. The court stated:
Field Intelligence’s supersession challenge places the parties’ mutual assent directly at issue. Its contention is that the parties agreed, by their 2017 contract, not to submit the dispute before us to an arbitrator. A court should rule on that issue before referring a case to arbitration. To hold otherwise would foster passing strange results.
But then, moving on, the Third Circuit panel in Field observed that the 2013 agreement required “express” language modifying any of its provisions. However, the merger clause in the 2017 agreement was general; it did not contain sufficiently “express” language (as required by the 2013 agreement). Thus, the 2013 agreement was still in effect, and the court ordered arbitration.
The Third Circuit panels in Zirpoli and Field (which were decided less than two weeks apart) shared a single common member, Judge Bibas, but the later opinion (Field) did not mention the earlier one. Interestingly, as noted above, Judge Bibas had filed a partial dissent in Zirpoli, concluding that under Pennsylvania law the parties had not made an arbitration agreement.
While the result in Field reaches a finish line (sending the case to arbitration), one may ask whether the Third Circuit’s reconciliation in Field of its requirement in MZM—that formation issues are to be resolved by a court—is why these questions are indeed called “mind-bending.” According to Field, supersession arguments are not affirmative defenses, such as fraud in the inducement, that address whether an otherwise enforceable agreement is voidable; they go to whether an agreement “exists” at the time of suit.
If this verbal jujitsu is less than satisfying, take heart: The “mind-bending” continues. The illegality argument in Zirpoli did not go to the existence of the agreement, but only to whether the assignment clause was enforceable. That, the court held, was for the arbitrator to decide. Yet, none of these distinctions help explain why the Cottrell court ignored the arbitration agreement in that case, why the Aguirre court essentially disregarded the reasoning of Cottrell, or how Kantz would have been resolved if there had not been a clause requiring court decision of such issues.
We look forward to future cases reconciling these opinions. But again, careful drafting up front might reduce some of this later “mind-bending.”