U.S. Nutraceuticals, LLC v. Cyanotech Corp.

Addressing who should decide whether a dispute falls within the scope of an arbitration clause, the U.S. Court of Appeals for the 11th Circuit reversed a district court’s denial of a motion to compel arbitration and remanded the case for an order compelling arbitration. U.S. Nutraceuticals, LLC v. Cyanotech Corp., No. 13-12863, 2014 WL 5471913 (11th Cir., Oct. 30, 2014) (Pryor, J.) (Wilson, J., dissenting).

The dispute over the scope of the arbitration clause existed because the clause changed over the course of the parties’ history.  In the parties’ initial agreement, all disputes were to be resolved in arbitration.  In 2010, however, the parties amended the agreement and, in relevant part, carved out of the arbitration clause disputes relating to the breach of the confidentiality provision of the parties’ agreement.  When one party sued the other for tortious interference and breach of the confidentiality provision, the defendant raised whether the dispute belonged in arbitration rather than litigation and moved a federal court to compel arbitration.  If the earlier agreement’s clause applied, then the parties would be required to arbitrate; if the more recent agreement’s clause applied, then the case could stay in the court system.  The district court held that the 2010 clause applied and denied the motion to compel arbitration.  Cyanotech appealed.

The 11th Circuit disagreed, noting first that both versions of the parties’ arbitration clause—like many arbitration clauses—incorporated the rules of the American Arbitration Association into it.  Under 11th Circuit precedent, such incorporation constituted a clear agreement to have an arbitrator decide whether the arbitration clause applies.  To avoid the all-inclusive arbitration clause in the earlier agreement, the plaintiff sued only under the 2010 agreement.  But the 11th Circuit considered this a mere “legal label” and examined the “true thrust” of the complaint (i.e., the facts alleged therein), which the court concluded implicated both the 2010 contract and the earlier.  In this case, that meant an arbitrator should decide whether the carve-out in the 2010 arbitration clause applies or not.

The dissenting judge took the plaintiff at its word and concluded that only the 2010 version of the clause applied.  Accordingly, the dissent would have affirmed the district court’s reliance on the carve-out and refusal to compel arbitration.

Practice Note: This case teaches several lessons to practitioners.  First, individuals or companies with long-standing relationships, governed by a sequence of agreements, should be cognizant of differences in their arbitrations clauses over time.  Second, when parties agree to change their arbitration clauses, they should consider whether they intend the changes to be retroactive.  Third, negotiators should consider including language regarding who decides arbitrability.  Finally, when pleading a dispute, consider whether claims can be pleaded to fall within (or without) a particular arbitration clause.