PHILADELPHIA – A federal appeals court has determined that a lower court erroneously threw out a motion to dismiss before properly resolving a separate motion to compel arbitration in a payroll dispute litigation.

U.S. Court of Appeals for the Third Circuit judges Thomas M. Hardiman, Jane R. Roth and D. Michael Fisher ruled June 13 to vacate and remand a prior order from the U.S. District Court for the Eastern District of Pennsylvania, which had denied motions to compel arbitration and for dismissal from defendant ERG Staffing Services, Inc.

Plaintiff Joshua Silfee sued ERG, his former employer, alleging ERG’s payroll practices violated Pennsylvania law. In response, ERG filed a motion to compel arbitration pursuant to Section 4 of the Federal Arbitration Act (FAA), arguing the arbitration agreement between Silfee and ERG’s payroll vendor precluded Silfee’s suit against ERG.

However, the District Court opted to “delay ruling” on ERG’s motion to compel arbitration, and instead proceeded to deny ERG’s separately-filed motion to dismiss based on the merits of Silfee’s state law claim. ERG then appealed the District Court’s denial.

Hardiman authored the Third Circuit’s opinion in this case, which believed the District Court erred in bypassing the instant Section 4 inquiry to rule on ERG’s motion to dismiss.

“Arbitrability is a ‘gateway’ issue, so ‘a court should address the arbitrability of the plaintiff’s claim at the outset of the litigation.’ In deciding a motion to compel arbitration, the role of the court ‘is strictly limited to determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the claim and any defenses to the arbitrator.’ Thus, after a motion to compel arbitration has been filed, the court must ‘refrain from further action’ until it determines arbitrability,” Hardiman said.

Hardiman said the District Court’s confusion may have resulted from the Third Circuit’s decision in Guidotti v. Legal Helpers Debt Resolution, where it described “the standard for district courts to apply” when assessing motions to compel arbitration.

“In Guidotti, we explained that a district court should apply one of two standards, depending on the circumstances; ‘When it is apparent, based on the face of a complaint, and documents relied upon in the complaint, that certain of a party’s claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery’s delay. But if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue,’ the district court may order limited briefing and discovery on the issue of arbitrability, then assess the question under the summary judgment standard,” Hardiman said.

According to Hardiman, the District Court did not think that Guidotti provided “a clearly-articulated standard of review” for this case, reasoning that “a disposition of a motion to compel arbitration under the summary judgment standard would be premature in this case,” but also thought that using “the 12(b)(6) standard would…run afoul of Guidotti because such a standard is to be applied only in cases where a party does not question the arbitrability or applicability of the arbitration agreement.”

So the District Court chose to “delay ruling on ERG’s motions to compel arbitration until a summary judgment stage when discovery is underway.”

“The District Court committed two errors in this regard. First, it did not recognize that the standards laid out in Guidotti are truly dichotomous. Because either the Rule 12(b)(6) or the Rule 56 standard will apply, there are no circumstances in which Guidotti does not provide a ‘clearly-articulated standard of review.’ Second, the District Court misstated the applicability of the Rule 12(b)(6) standard, reasoning that it ‘is to be applied only in cases where a party does not question the arbitrability or applicability of the arbitration agreement.’ But that interpretation would render the Rule 12(b)(6) standard a nullity,” Hardiman explained.

Hardiman added if a party had filed a motion to compel arbitration, then the other party had to have questioned arbitrability. But in contrast, if a party moves to compel arbitration based on an authentic arbitration agreement that is attached to the complaint, the Rule 12(b)(6) standard is appropriate unless “the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue.”

In his suit, Silfee alleged ERG violated Pennsylvania law by paying his wages through a debit card system which imposed various fees. ERG then submitted the terms and conditions that Silfee received from the payroll vendor along with that card, which included the arbitration clause at issue here.

“With a concededly authentic arbitration agreement attached to the complaint, the Rule 12(b)(6) standard was appropriate unless Silfee produced ‘additional facts sufficient to place the agreement to arbitrate in issue.’ He did not do so. Silfee neither denied receipt of nor assent to the terms and conditions, nor did he seek discovery. Instead, he argued that the arbitration agreement was unenforceable by ERG for ‘pure legal’ reasons. Those legal questions – based entirely on documents attached to the complaint – do not require additional discovery. Thus, the District Court should have applied the Rule 12(b)(6) standard and should do so on remand,” Hardiman said.

“Though both Silfee and ERG urge us to rule on arbitrability, we think it imprudent to do so. Here, the District Court did not identify – much less analyze – any of the parties’ competing arguments regarding arbitrability. Accordingly, we will remand to the District Court for consideration of ERG’s motion to compel arbitration in the first instance. For the foregoing reasons, we will vacate the order of the District Court and remand for further proceedings consistent with this opinion,” Hardiman concluded.

The plaintiff is represented by Gary F. Lynch of Carlson Lynch Sweet & Kilpela in Pittsburgh and Richard Shenkan of Shenkan Injury Lawyers in West Bloomfield, Mich.

The defendants are represented by James S. Urban of Jones Day in Pittsburgh, Joseph Kernen of DLA Piper, Jennifer Burke Dempsey and Michael P. Daly of Drinker Biddle & Reath, all in Philadelphia, plus Mary D. Walsh Dempsey of Ufberg & Associates, John G. Dean and Patrick R. Casey of Elliott Greenleaf, all in Scranton.

U.S. Court of Appeals for the Third Circuit case 16-3275

U.S. District Court for the Middle District of Pennsylvania case 3:15-cv-00023

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com

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