Labor Logic

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John D. Finerty, Jr.

Business contracts in general, and employment contracts in particular, often contain an arbitration clause that requires parties arbitrate disputes rather than file a lawsuit.

Arbitration clauses also usually contain a forum clause that specifies where the arbitration hearing is to take place. When one party to the contract refuses to arbitrate, however, the Federal Arbitration Act dictates where the other party may sue for compliance with the agreement and to compel arbitration.

The FAA

The Federal Arbitration Act, or FAA, sets out the general rules on how the arbitral and judicial forums compliment each other. Specifically, the FAA provides that arbitration agreements are enforceable and that a party may file an expedited proceeding to compel arbitration when the other party to a contract refuses to arbitrate.

Section 4 of the FAA authorizes federal district courts to issue orders compelling arbitration in accordance with the terms of the arbitration clause. The issue arose in Ansari v. Qwest Communications Corp., Case No. 04-1262 (10th Cir. Jul. 12, 2005), however, as to which district court has jurisdiction to issue orders to arbitrate.

Section 4 of the FAA also provides that, pursuant to an order compelling arbitration, the arbitration proceeding “shall be within the district in which the petition for an order directing such arbitration is filed.” See 9 U.S.C. § 4. Some federal circuit courts of appeal interpret this provision of the FAA as jurisdictional; others treat it as merely an alternative forum in which to conduct the arbitration.

The Tenth Circuit, consistent with the Seventh Circuit in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323 (7th Cir. 1995), held that the only district court that has jurisdiction to issue an order compelling arbitration is the court that covers the specific location identified in the contract to conduct the arbitration hearing.

Therefore, if an arbitration clause specified that an arbitration hearing shall take place in Milwaukee, Wisconsin, then the only federal district court that has jurisdiction to compel arbitration is the U.S. District Court for the Eastern District of Wisconsin.

A Split Among The Circuits

The majority of federal circuits, including the Tenth, Seventh and Sixth Circuit in Inland Bulk Transfer Co. v. Cummins Engine Co., 332 F.3d 1007 (6th Cir. 2003), narrowly interpret § 4 of the FAA to limit district courts in ordering arbitration pursuant to arbitration agreements but only if the agreement specifies a location within the district as the location for the hearing. Other circuits have taken different approaches. The alternative approaches give parties additional options in deciding where to file a federal lawsuit seeking to compel arbitration under the FAA.

For example, the Fifth Circuit in Dupuy-Busching General Agency, Inc. v. Ambassador Ins. Co., 524 F.2d 1275 (5th Cir. 1975), held that a federal district court may compel arbitration in the district specified in the arbitration clause, even if the district is outside the court’s own jurisdiction. Thus, if an arbitration clause specified Milwaukee, Wisconsin as the location for the arbitration hearing, a party to the contract with its corporate headquarters in Houston, Texas, for example, could sue in a Texas district court to compel arbitration in Wisconsin.

The Ninth Circuit, on the other hand, created yet a third rule in Textile Unlimited, Inc. v. A.BMH & Co., 240 F.3d 781 (9th Cir. 2001). In that case, the court held that the forum selection clause in an arbitration agreement does not bind a district court; rather, a district court may compel arbitration in its own district without regard to the agreement between the parties. To illustrate further, if an agreement called for arbitration in Milwaukee, Wisconsin, and one of the parties was based within the Ninth Circuit, it could sue in a district court in the Ninth Circuit and compel arbitration there, rather than in Wisconsin.

For more information on these cases or for assistance with a Federal Arbitration Act claim, contact John D. Finerty, Jr at Michael Best & Friedrich LLP at (414) 225-8269 or on the Internet at [email protected].