In 2017, the Arizona Supreme Court confirmed that Arizona’s Revised Uniform Arbitration Act or RUAA codified the separability doctrine as established by the United States Supreme Court in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). In the case, a hospital LCMC hired Jeffrey Hamblen as its CEO in 2003, but by 2014 claimed that Hamblen misrepresented two important facts as part of his hire, and thus alleged that it was fraudulently induced to enter into Hamblen’s employment agreement. As the dispute between the two continued, Hamblen filed an arbitration demand consistent with his employment contract and LCMC filed an action in superior court. At Hamblen’s request, and over LCMC’s objection, the superior court stayed LCMC’s action and ordered the parties to arbitrate the dispute. The arbitration provision provided, in part, that
“Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration . . . . All counterclaims that would be compulsory or permissive under Federal Rule of Civil Procedure 13(a) and (b) if the claim were filed in court shall be asserted in the arbitration and not otherwise.”
After a multi-day arbitration, in which LCMC asserted a variety of claims and theories, the arbitrator issued an order (a) denying Hamblen any severance pay under the employment agreement and (b) ruling that LCMC had grounds to rescind, and did rescind, the employment contract based on Hamblen’s misrepresentations and omissions, “which abrogates the agreement undoes it from the beginning.” LCMC was not awarded any other damages.
Following the arbitration, LCMC moved in superior court to confirm the final award, but also asked the court to lift the stay to allow LCMC to seek damages from Hamblen for claims that LCMC asserted or could have asserted in the arbitration. Hamblen agreed that the arbitration award should be confirmed, but opposed the remainder of LCMC’s motion. The superior court granted LCMC’s request, finding that based on the arbitrator’s ruling, “to deny [LCMC’s] right to a jury trial to prove damages on its claims is unreasonable as the contract was rescinded and undid [sic] from its very beginning.” The Court of Appeals denied Hamblen’s special action appeal, but the Arizona Supreme Court granted his petition for review to examine the separability doctrine in Arizona.
As originally adopted by the United States Supreme Court in a case of fraudulent inducement of a contract, the separability doctrine provides that “if the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the ‘making’ of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967).
Citing to Prima Paint, the Arizona Court of Appeals had previously explained that under the separability doctrine, the “arbitration clause is considered to be an agreement independent and separate from the principal contract.” U.S. Insulation, Inc. v. Hilro Constr. Co., Inc., 146 Ariz. 250, 253 (App. 1985). If there is not a claim “that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud.” Id. (emphasis in original). In Hamblen, the Arizona Supreme Court cited to U.S. Insulation and confirmed that “Arizona law codifies the separability doctrine and thus applies to all contracts governed by [the Revised Uniform Arbitration Act and/or the Uniform Act.” Hamblen v. Hatch, 242 Ariz. 483, 487, ¶ 16 (2017).
Applying these principles to Hamblen’s case, the Arizona Supreme Court held that LCMC did not “challenge the validity of the arbitration agreement separately and distinctly from [its] challenge of the underlying contract.” Id. at 490, ¶ 28. Had it “separately and specifically challenged, even on identical grounds, both [the] arbitration agreement and the underlying [employment] contract” the superior court “conceivably could have found the arbitration clause to be unenforceable, denied Hamblen’s motion to compel arbitration, retained jurisdiction, and ruled on the merits of all claims.” Id. But the superior court properly compelled arbitration of all the claims, including LCMC’s claim for rescission, and once the arbitrator issued the ruling that resolved all claims that are subject to arbitration, LCMC could not bring any such claims in the Superior Court.
Recently, the Arizona Court of Appeals examined the separability doctrine in a dispute between a public storage facility and individuals who rented storage units. Duncan v. Public Storage, Inc., 2022 WL 678042 (Ariz. App. March 8, 2022). The renters opposed the storage facility’s motion to compel arbitration, but the Court noted that the renters did not raise a defense consistent with the separability doctrine in their written response to the motion. However, the Court exercised its discretion to address the merits of the issue “because the renters advanced a theory consistent with the separability doctrine both during oral argument in the superior court and on appeal.” Duncan, 2022 WL 678042, at *3 ¶ 15. At oral argument, the renters argued that “Public Storage induced the making of the arbitration [clause] itself by fraudulently representing the very essence of the security it was supposed to provide.” Id. at ¶ 17. Ultimately, the Court remanded to the superior court to determine whether the storage facility “fraudulently induced the renters to agree to arbitration,” and that “[w]hat induced the renters into entering into the entire rental contract is irrelevant to that determination.” Id. at *5, ¶ 25.
If you or your client is facing an arbitration-related issue—whether to move to enforce arbitration or to oppose it—keep in mind the separability doctrine. Even if a party alleges that the entire agreement is somehow invalid or procured through fraud, unless the party separately alleges grounds that the arbitration provision itself is also invalid or the result of fraud, the court will likely send the matter to arbitration. Contact us today so that we can work through these complicated issues.
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