ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, April 14, 2014

First Circuit Grants Verizon's Motion to Compel Arbitration in a Fraud Suit

1st CircuitLast month, the First Circuit decided Grand Wireless, Inc. v. Verizon Wireless, Inc.  In 2002, Grand Wireless (Grand) entered into an Agreement to serve as an exclusive agent for Verizon Wireless (Verizon) within a defined geographic area.  The Agreement had a five-year term, after which it became month-to-month, terminable on thirty days' written notice.  The Agrement also provided for arbitration of all disputes by the American Arbitration Association (AAA).  

Verizon gave notice of its intention to terminate the relationship on July 19, 2011.  At Grand's request, the relationship was extended until October 31, 2011 so that Grand could sell its stores to another Verizon agent.  Grand alleged that, during the month of October 2011, Verizon employee Erin McCahill sent out a postcard to Grand's customers notifying them that Grand's stores had closed and directing them to the nearest Verizon dealers.  Grand alleged that McCahill knew that this information was false when she sent it out. Grand further alleged that this mailing caused its business to collapse as the mailing caused its negotiations with T-Mobile to fail.  Grand filed an action in state court against McCahill and Verizon alleging fraud and federal RICO violations.

Verizon removed the case to federal court and then moved to compel arbitration.  The District Court denied the motion without opinion, simply adopting the arguments in Grand's memorandum of law.  So the District Court agreed with Grand that its claims were not covered by the arbitration clause and that McCahill, a non-party, could not rely on the arbitration clause.

The First Circuit reversed.  As to the first issue, the First Circuit found it "clear that Grand’s claims 'arise out of or relate to' the Agreement and therefore fall within the scope of the arbitration clause."  Even if it were a close call, the Court noted, the presumption in favor of arbitration would apply.

As to the second issue, Verizon argued that because "Ms. McCahill was acting as an agent of Verizon and the claims against her 'relate solely to her performance as an employee,' she is entitled to invoke the arbitration clause."  The First Circuit agreed: "Verizon and Grand certainly wished to have their disputes settled by arbitration. Since Verizon could operate only through the actions of its employees, it would have made little sense to have agreed to arbitrate if the employees could be sued separately without regard to the arbitration clause."  

This ruling is consistent with those of other Circuit Courts that have addressed the issue.  However, in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), the U.S. Supreme Court held that state law controls whether a non-party to an arbitration agreement seek protection under  that agreement.  But Carlisle did not address whether employees could avail themselves of the arbitration agreements entered into by their employers, and the case indicated no intention to overrule the Circuit Court rulings indicating that employees could avail themselves of such agreements.   In any case, the Court found that Grand had identified no principle of New York state law indicating that McCahill should be prohibited form enjoying the protections of her employer's arbitration agreement.

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