Review of Court Decisions
Courts Decide Whether a Contract Is Formed
The 9th Circuit held that courts, not arbitrators, decide whether arbitration was agreed in a contract whose existence is challenged.
Patricia Sanford purchased workout tapes over the phone. This purchase automatically enrolled her in a trial membership in a discount buyers program operated by MemberWorks. If she did not want to be charged the annual fee, she had to cancel before the trial membership ended. She did not cancel and was charged $72 for the first year and $84 for a renewal membership. Sanford claimed never joined the program or renewed. MemberWorks refunded the $84, but not the $72. Sanford sued, alleging unfair trade practices in violations of federal law and state law. MemberWorks moved to compel arbitration. Relying on Prima Paint Corp. v. Flood & Conklin Manufacturing Co. (388 U.S. 395, 1967) for the principle that any challenges to the overall contract are for arbitrators to decide, the district court granted the motion.
The arbitrator initially found that he lacked jurisdiction to decide whether a contract had been formed, but later concluded that the court must have found that a contract existed. But when ruling on Sanford's federal claim, the arbitrator determined that there was no offer and acceptance, and therefore no contract between the parties.
The 9th Circuit reversed, ruling that the district court should have decided the validity of the purported contract in the first instance. It said the FAA requires a district court to first determine that a valid agreement to arbitrate exists before ordering the parties to submit their claims to arbitration. This encompasses challenges to the making of the contract containing the arbitration clause. The court relied on Three Valleys Municipal Water District v. E.F. Hutton & Co. (925 F.2d 1136, 9th Cir. 1991), which limited Prima Paint "to challenges seeking to avoid or rescind a contract-not to challenges going to the very existence of a contract that a party claims never to have agreed to." The 9th Circuit found that under Three Valleys, "[i]ssues regarding the validity or enforcement of a putative contract mandating arbitration should be referred to an arbitrator, but challenges to the existence of a contract as a whole must be determined by the court prior to ordering arbitration."
The court remanded the case to the district court to determine whether a contract was formed between Sanford and MemberWorks.
Patricia Sanford v. MemberWorks, Inc., No. 05-55175, 2007 WL 1112676 (9th Cir. April 16, 2007).
Court Upholds Anti-Suit Injunction
The 2nd Circuit affirmed in part a district court order granting an anti-suit injunction based on the factors in the China Trade case.
This case involved a charter party agreement providing for arbitration of disputes in London. The terms of the charter party were incorporated into the bill of lading directing delivery from the charterer (Chemlube) to Ibeto Petrochemical in Nigeria. Ibeto claimed that the shipment iwas contaminated by seawater. Ibeto instituted an action in Nigeria against Bryggen Shipping (the owner) and the Motor Tanker Ship Beffen, which carried the shipment. Ibeto filed for arbitration in London and commenced an "admiralty and marine" litigation in court in New York. Bryggen sought to enjoin the Nigerian litigation in view of the arbitration clause. Ibeto terminated the arbitration in London, preferring to litigate in Nigeria. It petitioned the district court to voluntarily dismiss the New York action without prejudice.
The district court denied this motion and compelled arbitration. It also granted Bryggen an injunction enjoining the litigation in Nigeria, finding that to allow the Nigerian litigation would frustrate the general federal policy of promoting arbitration. Ibeto appealed.
The 2nd Circuit held that district court had a sound basis for issuaning the injunction. …