Friday, June 7, 2013

FYI: 3rd Cir Attempts to Clarify Standards for Motions to Compel Arbitration

The U.S. Court of Appeals for the Third Circuit recently vacated and remanded a lower court's order denying arbitration to a bank and processing agent.


In so ruling, the Court held that: (1) when it is apparent on the face of the complaint that a party's claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery's delay; (2) alternatively, if the complaint is unclear or the opposing party has placed the agreement to arbitrate at issue, the parties are entitled to "limited discovery," after which time the court should apply a Rule 56 standard.


A copy of the opinion is available at:


Plaintiff-debtor ("Debtor") filed a putative class action against twenty-two defendants (collectively, "Defendants"), alleging that they conspired to defraud her while leading her to believe that they were negotiating a settlement of her consumer debt.  Thirteen defendants, including Rocky Mountain Bank and Trust and Global Client Solutions (collectively, "Appellants"), filed motions to compel arbitration.  All were granted except as to Appellants.


The dispositive issue before the lower court was whether the agreement with Appellants ("Account Agreement") was received before or after Debtor executed the Special Purpose Account Application ("SPAA") which expressly incorporated the Account Agreement.  Notably, although other agreements, including the SPAA, had a "DocuSign" header, the Account Agreement did not.


Hoping to clarify the standards to be applied to motions to compel, the Third Circuit identified the circumstances under which lower courts should apply a "motion to dismiss" standard and those under which they should apply a "summary judgment" standard.  In reviewing a motion to dismiss under Rule 12(b)(6), courts determine whether, under any "plausible" reading of the pleadings, plaintiff is entitled to relief.  See Fed. R. Civ. P. 12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).  In doing so, the courts consider "only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents."  See Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).  Therefore, no discovery is required under the Rule 12(b)(6) standard.


By contrast, a court grants a motion for summary judgment, under Rule 56, if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."  See Fed. R. Civ. P. 56(a).  Because summary judgment can be supported or defeated by citing a developed record, courts must give the parties "adequate time for discovery."  See Celotex Corp. v. Caltrett, 477 U.S. 317, 322 (1986).


Recognizing that both standards have been used in motions to compel arbitration, the Third Circuit determined that the split pronouncements on the standard for deciding a motion to compel arbitration are reconcilable.  Where the affirmative defense of arbitration of a claim is "apparent on the face of a complaint (or…documents relied upon in the complaint)" then the courts should resolve a motion to compel arbitration under a Rule 12(b)(6) standard.  See Somerset Consulting, LLC v. United Capital Lenders, LLC, 832 F. Supp. 2d 474, 481 (E.D. Pa. 2011). 


However, the Third Circuit recognized that some scenarios require a "more deliberate pace."  Where arbitrability is not apparent on the face of the complaint, a motion to compel arbitration must be denied pending further development of the factual record.  Where arbitrability has been "facially" established in the complaint, but the non-movant has come forward with enough evidence in response to the motion to compel arbitration, then the issue should be judged under a Rule 56 standard.  See Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 55 (3d Cir. 1980).  Under either scenario, the non-movant must be given the opportunity to conduct "limited discovery on the narrow issue concerning the validity of the arbitration agreement."  See Deputy v. Lehman Bros., Inc. 345 F.3d 494, 511 (7th Cir. 2003).


As to Appellant's motion to compel arbitration, the Third Circuit first noted that, under a Rule 12(b)(6) standard, there can be no reading of the complaint that could relieve Debtor of the arbitration provision of the Account Agreement.  However, because the complaint is not the only relevant document, the Court considered Debtor's other evidence.


Here, Debtor denied making an arbitration agreement with Appellants despite having signed the SPAA, which incorporated the Account Agreement by reference.  In support of her denial, Debtor pointed out that while the other agreements received by her, including the SPAA, had a specific header, the Account Agreement did not have such a header.  Appellants argued that Debtor's denial was a mere "naked assertion" that she did not intend to be bound by the arbitration agreement, and should be dismissed without further delay.  See Par-Knit Mills, 636 F.2d at 55.


The Third Circuit disagreed.  It noted that the Debtor's evidence regarding the headers was "not insubstantial."  Debtor had come forth with enough evidence, "even without an affidavit," in response to Appellant's arbitration motion to trigger the Rule 56 standard.  As such, the Court held that the motion should not have been ruled on "without first allowing limited discovery and then entertaining their motion under a summary judgment standard."


Accordingly, the Court vacated the lower court's order denying the Appellants' motion to compel arbitration, and remanded for proceedings consistent with this opinion.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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