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Fallo v. High Tech Institute: CIVIL PROCEDURE | ARBITRATION - error finding court authority regarding arbitrability question and denying motion to compel; reversed, remand

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 08-2437
___________
Jan Fallo; Pamela Epperson; Laura *
Muehlan; Verne Anderson; Amy *
Clark; Yulanda Diamond; Monica *
Licklider; Latonya Love; Mary *
McNurlin; Jessica Richardson; *
Kisha Robinson; Patricia *
Stuteville; Zach Green; Dene Beck; *
Carrie Boyer; Jamika Brewer; *
Yulanda Boyd; Kelly Brewster; *
Kristeena Cloud; Jenna Edelen; *
LaToya Hardin; Tameila Hardley; *
Tynesha Hooker; Luctoine *
Jean-Philippe; Barbara Johnson; * Appeal from the United States
DeAndre Johnson; Alonzo Jones; * District Court for the
Margie Kelley; Diane Mitchell; * Western District of Missouri.
Marina Paltsmakher; Lectura *
Sanders; Deannia Sherman; *
Lindsay Sims; Tammy Simsheuser; *
Mary Surridge; Dawn Williams- *
Kleoppel; Peggy Wilson; Linda *
Womack, *
*
Appellees, **
v. *
*
High-Tech Institute, *
*
Appellant. *
___________
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Submitted: January 13, 2009
Filed: March 24, 2009
___________
Before BYE, COLLOTON and GRUENDER, Circuit Judges.
___________
GRUENDER, Circuit Judge.
Thirty-eight current and former students filed suit against High-Tech Institute
(High-Tech). High-Tech moved to compel arbitration, arguing that an arbitrator
should determine whether the students tort claims were within the scope of the
arbitration provision in the students enrollment agreements. The district court held
that it had the authority to determine the question of arbitrability, that the arbitration
provision did not cover the students tort claims, and that High-Techs motion to
compel arbitration should be denied. High-Tech appeals, and for the reasons
discussed below, we reverse.
I. BACKGROUND
On October 25, 2007, thirteen current and former students filed suit against
High-Tech, a for-profit vocational school, in the Circuit Court of Jackson County,
Missouri. The complaint alleged that High-Tech engaged in fraudulent
misrepresentation, violated the Missouri Merchandising Practices Act, negligently
trained and supervised employees, and breached the enrollment agreement it had
entered into with each student. High-Tech removed the case to federal district court
under 28 U.S.C. 1332. High-Tech then moved to compel arbitration pursuant to the
arbitration clause contained in the enrollment agreement and to stay the judicial
proceedings. The arbitration clause in the enrollment agreement states:
Any controversy or claim arising out of or relating to this Agreement, or
breach thereof, no matter how pleaded or styled, shall be settled by
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arbitration in accordance with the Commercial Rules of the American
Arbitration Association at Kansas City, Missouri, and judgment upon the
award rendered by the Arbitrator may be entered in any court having
jurisdiction.
The enrollment agreement also contains a separate provision concerning governing
law, which provides:
The laws of the State of Missouri shall govern this Agreement. Should
the School institute proceedings for monies due from the Student for
services provided, the Student shall pay all costs, including reasonable
attorneys fees, court costs and collection fees, incurred by the School.
The district court granted in part and denied in part High-Techs motion to
compel arbitration, finding that the arbitration clause was not unconscionable and that
the arbitration provision required only the students breach of contract claim to be
submitted to arbitration. The district court also stayed judicial proceedings pending
the outcome of arbitration on the breach of contract claim. The students then
voluntarily dismissed their breach of contract claim and filed an amended complaint,
which added twenty-five plaintiffs and included only the three tort claims. High-Tech
filed a second motion to compel arbitration and to continue the stay of judicial
proceedings. High-Tech argued that the question of arbitrability should be determined
by an arbitrator, rather than the district court, and, alternatively, that the arbitration
provision requires arbitration of the tort claims.
The district court denied High-Techs second motion, holding that it had the
authority to decide the question of arbitrability because the parties did not clearly
agree to leave the arbitrability issue to an arbitrator. The court then found that the
arbitration provision did not compel arbitration of the students three tort claims.
High-Tech appeals, arguing that the district court erred in determining that it had the
authority to decide the question of arbitrability. High-Tech also argues that even if
-4-
the district court correctly answered the question of arbitrability, it erred in finding
that the arbitration provision did not cover the students tort claims.
II. DISCUSSION
We first address High-Techs argument that the district court erred by
determining that it had the authority to decide the threshold question of arbitrability
of the students tort claims. We review de novo a district courts decision to deny a
motion to compel arbitration. EEOC v. Woodmen of the World Life Ins. Socy, 479
F.3d 561, 565 (8th Cir. 2007). Just as the arbitrability of the merits of a dispute
depends upon whether the parties agreed to arbitrate that dispute, so the question who
has the primary power to decide arbitrability turns upon what the parties agreed about
that matter. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (internal
citations omitted). Courts should not find that parties agreed to arbitrate the question
of arbitrability [u]nless the parties clearly and unmistakably provide otherwise. AT
& T Techs., Inc. v. Commcns Workers of Am., 475 U.S. 643, 649 (1986). Thus, we
must determine whether the parties to the enrollment agreement clearly and
unmistakably intended for an arbitrator to determine the question of arbitrability.
The arbitration provision in the enrollment agreement states that disputes
arising out of the enrollment agreement shall be settled by arbitration in accordance
with the Commercial Rules of the American Arbitration Association [AAA Rules].
High-Tech argues that the provisions incorporation of the AAA Rules clearly and
unmistakably demonstrates that the parties intended to arbitrate the question of
arbitrability because Rule 7(a) of the AAA Rules provides that arbitrators determine
their own jurisdiction.
We have not directly addressed the effect of the AAA jurisdictional rule on
arbitrability disputes. Express Scripts, Inc. v. Aegon Direct Mktg. Servs., Inc., 516
F.3d 695, 701 (8th Cir. 2008). However, we have previously addressed the effect of
-5-
incorporating the National Association of Securities Dealers (NASD) Codes
jurisdictional rule. FSC Secs. Corp. v. Freel, 14 F.3d 1310, 1312-13 (8th Cir. 1994).
Section 35 of the NASD Code, at issue in FSC, provides that arbitrators have the
authority to interpret and determine the applicability of all provisions under [the
NASD] Code. Id. at 1312. This court held that the parties incorporation of the
NASD Code included an adoption of Section 35 and was a clear and unmistakable
expression of [the parties] intent to leave the question of arbitrability to the
arbitrators. Id. at 1312-13.
The act of incorporating Rule 7(a) of the AAA Rules provides even clearer
evidence of the parties intent to leave the question of arbitrability to the arbitrator
than does the act of incorporating Section 35 of the NASD Code because Rule 7(a)
expressly gives the arbitrator the power to rule on his or her own jurisdiction.
Consequently, we conclude that the arbitration provisions incorporation of the AAA
Rules, like the incorporation of the NASD Code in FSC, constitutes a clear and
unmistakable expression of the parties intent to leave the question of arbitrability to
an arbitrator. See FSC, 14 F.3d at 1312. Most of our sister circuits that have
considered this issue agree with our conclusion that an arbitration provisions
incorporation of the AAA Rulesor other rules giving arbitrators the authority to
determine their own jurisdictionis a clear and unmistakable expression of the
parties intent to reserve the question of arbitrability for the arbitrator and not the
court. See, e.g., Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006);
Terminix Intl Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th Cir. 2005); Contec
Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005); Apollo Computer,
Inc. v. Berg, 886 F.2d 469, 472-73 (1st Cir. 1989). But see Riley Mfg. Co. v. Anchor
Glass Container Corp., 157 F.3d 775, 780 (10th Cir. 1998) (finding that the parties
did not specifically intend to submit the question of arbitrability to an arbitrator
despite a reference to the AAA Rules in the arbitration provision).
-6-
The students raise several arguments in support of the district courts decision
to deny High-Techs motion to compel arbitration of their tort claims. First, the
students argue that the arbitration provision is unconscionable and therefore
unenforceable. Under Missouri law, [u]nconscionability has two aspects: procedural
unconscionability and substantive unconscionability. State ex rel. Vincent v.
Schneider, 194 S.W.3d 853, 858 (Mo. 2006). Procedural unconscionability deals
with the formalities of making the contract, while substantive unconscionability deals
with the terms of the contract itself. Id.
The students contend that the arbitration clause is procedurally unconscionable
because the arbitration provision appeared in fine print on the back of the contract,
there was no negotiation between the parties concerning arbitration, and High-Tech
was in a superior bargaining position. The enrollment agreement, however, consisted
of a single sheet of paper printed on both sides that set out basic terms, such as tuition
and other fees, course and graduation requirements, transferring and termination
options, and refund and leave of absence policies. The arbitration provision was not
hidden in unreadable fine print among these other terms. See id. (explaining that one
aspect of procedural unconscionability includes unreadable fine print). Moreover,
the students presented no evidence that High-Tech used high-pressure sales tactics to
coerce them into signing the enrollment agreement. See id. Although High-Tech may
have been in a superior bargaining position, the contract terms were clear, and a
reasonable person could expect that disputes would be arbitrated. See Swain v. Auto
Servs., Inc., 128 S.W.3d 103, 107-08 (Mo. Ct. App. 2003). Therefore, we agree with
the district court that the arbitration clause is not procedurally unconscionable.
Because we find no procedural unconscionability, we need not reach the substantive
unconscionability question. See Whitney v. Alltel Commcns, Inc., 173 S.W.3d 300,
308 (Mo. Ct. App. 2005) (Generally there must be both procedural and also
substantive unconscionability before a contract or clause can be voided.); cf. Kan.
City Urology, P.A. v. United Healthcare Servs., 261 S.W.3d 7, 15 (Mo. Ct. App.
-7-
2008) (reversing the trial courts finding of unconscionability where it found only
substantive unconscionability and not procedural unconscionability).
Next, the students contend that even if the arbitration provision is enforceable,
the district court correctly determined that it had the authority to decide the question
of arbitrability. The students argue that the governing law provision of the enrollment
agreement requires the application of Missouri law, which states that a court must
determine the question of arbitrability as a matter of law. See Dunn Indus. Group, Inc.
v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. 2003). However, the Supreme
Court has held that an arbitration provisions incorporation of the AAA Rules
supersedes a choice-of-law provision contained in the same agreement. Preston v.
Ferrer, 552 U.S. ---, 128 S. Ct. 978, 989 (2008) (explaining that the best way to
harmonize the parties adoption of the AAA Rules and their selection of California
law is to read the latter to encompass prescriptions governing the substantive rights
and obligations of the parties, but not the States special rules limiting the authority
of arbitrators (quoting Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
63-64 (1995))). Thus, the arbitration provisions incorporation of the AAA Rules
supersedes Missouri law regarding the question of arbitrability.
Finally, the students argue that the governing law provision conflicts with the
arbitration provision, thereby undermining the conclusion that the parties intended to
authorize an arbitrator to determine the question of arbitrability. In particular, the
students argue that the reference to court costs conflicts with a clear and
unmistakable intent to arbitrate. However, after participating in arbitration, a party
may seek to have the arbitrators order confirmed, modified or vacated in a court,
thereby incurring court costs. See, e.g., Crawford Group, Inc. v. Holekamp, 543 F.3d
971, 976 (8th Cir. 2008). Thus, the governing law provisions reference to court
costs is not inconsistent with a clear and unmistakable intent to arbitrate because it
merely provides that High-Tech may recover court costs in the event that one of the
parties files a post-arbitration action in court. See Wildflower Cmty. Assn v.
1As a result, we need not reach High-Techs alternative argument that the
district court erred in finding that the students tort claims were not within the scope
of the arbitration provision.
-8-
Rinderknecht, 25 S.W.3d 530, 534 (Mo. Ct. App. 2000) (explaining that [e]ach
provision [of a contract] is construed in harmony with the others to give each
provision a reasonable meaning and avoid an interpretation that renders some
provisions useless). The students further contend that the governing law provisions
statement that the Student shall pay all costs, including reasonable attorneys fees
conflicts with AAA Rule 43. See AAA Rule 43(d)(ii) (providing that an arbitrator
may award attorneys fees in certain circumstances, including when authorized by the
arbitration agreement). We see no conflict between the governing law provision and
AAA Rule 43(d)(ii) because the enrollment agreement in this case contains the
arbitration clause and expressly authorizes an award of attorneys fees. Thus, the
governing law provision does not undermine our conclusion that the parties had a
clear and unmistakable intent to arbitrate.
We find that the district court erred when it held that it had the authority to
determine the question of arbitrability because the parties incorporation of the AAA
Rules is clear and unmistakable evidence that they intended to allow an arbitrator to
answer that question.1 Accordingly, we conclude that the district court erred in
denying High-Techs motion to compel arbitration and to continue the stay of judicial
proceedings. See 9 U.S.C. 3 (stating that a court shall on application of one of the
parties stay the trial of the action until . . . arbitration has been had in accordance with
the terms of the agreement).
III. CONCLUSION
For the foregoing reasons, we reverse and remand to the district court with
instructions to enter an order granting High-Techs motion to compel arbitration and
continue the stay of judicial proceedings.
______________________________
 

 
 
 

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