Multiple Contracts, The FAA and Losing Your Ability To Arbitrate
In a recent Seventh Circuit opinion, Haber v. Biomet, Inc. et al., (Doc. No 08-1670), the 
federal circuit court found that a state court determination could preclude it from considering an issue regarding the arbitrability of a contract dispute.
In Haber, the plaintiff brought an action in the Southern District of Indiana after it had been sued in Indiana state court by the defendant over a contract dispute. The plaintiff acted as a distributor of defendants prosthetic parts and the two actions were based on allegations that plaintiff performed some work on behalf of the defendants competitor.
The parties also had a disagreement over the proper dispute resolution portion of their contracts controlled their actions. The defendant believed that a litigation clause in a 1995 contract stating that any disputes would be settled through litigation in Indiana held sway and the plaintiff believed that an arbitration clause in a 1999 contract stating that arbitration would take place in Chicago, Illinois.
The federal district court held that it the Southern District of Indiana was an improper venue for an motion to compel arbitration based off an arbitration provision which stated that Chicago, Illinois would be the location of the arbitration. The State court denied a motion to compel arbitration in part, stating that the arbitration provision should apply to disputes arising out of the 1999 contract and that the litigation provision should apply to disputes arising out of the 1995 contract.
The plaintiff chose only to appeal the federal district court’s decision and the 7th Circuit held that pursuant to Section 4 of the Federal Arbitration Act…
“The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.” 9 U.S.C. §4
…it was plain that any determination about the arbitration in federal court needed to be filed in the Northern District of Illinois. The 7th Circuit even noted how odd it was that there was no motion to transfer venue to the Northern District:
“We do find it strange that [Plaintiff] did not at some point file a motion for transfer to the Northern District of Illinois in Chicago”
The appellate court held that it was improper to bring the claim in the Southern District of Indiana.
With regard to the state court claim, the court found that it lacked the authority to review the decision because res judicata barred it from doing so given that the doctrine of issue preclusion applied once the state court made a determination regarding arbitrability. The state court decision should have been appealed.
The lessons regarding familiarizing yourself with the FAA are clear for practitioners. For those contracting for certain dispute resolution rights and entering into multiple agreements, it is painfully apparent how important consistency in those provisions can be.
