[co-author: Kevin Stawicki]
Facing a federal lawsuit, companies with agreements that mandate arbitration of disputes must decide how to efficiently obtain an order from a federal judge compelling arbitration. The Third Circuit Court of Appeals recently clarified how to do so in the District Courts in that Circuit (New Jersey, Delaware and Pennsylvania), correcting what the Court admitted was “a misstep we caused” in a prior decision.
The case, Meghan Young v. Experian Information Solutions Inc., was a proposed class action by plaintiff Meghan Young who alleged that Experian violated the Fair Credit Reporting Act by incorrectly listing her as having been in foreclosure. Young never disputed that, and when she signed up for credit monitoring services online, she agreed to the terms of service, which included an agreement to resolve disputes with Experian through arbitration. Experian asked the court to compel arbitration based on that agreement.
The district judge denied the motion, however, finding that the agreement was not attached to, referenced in or integral to the plaintiff’s complaint, so it could not be considered on a Rule 12(b)(6) motion to dismiss. Reyling on the Third Circuit’s 2013 decision in Guidotti v. Legal Helpers Debt Resolution, the district judge ordered limited discovery on arbitrability. In Guidotti, the Third Circuit had set forth two paths to compel arbitration: If it is apparent from the face of the complaint that the claims are subject to an enforceable arbitration clause, the district court can consider the motion under the familiar motion to dismiss standard, assuming the truth of plaintiff’s allegations. If, however, the complaint is not clear on the agreement to arbitrate or if the plaintiff places the existence of the agreement in dispute through reliable evidence, then the parties should be entitled to discovery and the motion should be treated like a summary judgment motion.
Writing for the Court, Circuit Judge Kent A. Jordan, who also authored the decision in Guidotti, conceded the language in Guidotti was “more prescriptive than is helpful or accurate” because it suggested discovery will be necessary and the plaintiff “must” be given the opportunity to conduct discovery. Correcting a misperception the District Court relied on in ordering discovery, Judge Jordan explained:
- Guidotti’s call for limited discovery into arbitrability is best understood as being itself limited. It should be read as encouraging factual discovery when such discovery is warranted, which will often be the case but not always. In the absence of a factual dispute, there is nothing to discover and thus no need to delay a decision on the motion to compel.
The Young-Experian contract delegated the arbitrability determination to the arbitrator, the Third Circuit explained, and there was no dispute that the agreement itself was enforceable, so there was no reason for the District Court to require discovery.
For companies moving to compel arbitration in the Third Circuit, Young is a welcome clarification that should prevent needless delays caused by limited discovery if the plaintiff chooses not to reference the arbitration agreement in its complaint. The procedural rules may be different in other jurisdictions so companies should consult with litigation counsel before proceeding.
