In a recent decision, the Sixth Circuit Court of Appeals has affirmed that a party who has, without reservation, affirmatively invoked an arbitration provision has waived the right to argue that the provision is unenforceable under the Federal Arbitration Act. The case, PolyOne Corp. v. Westlake Vinyls, Inc., No. 19-5137 (6th Cir. Sep. 6, 2019), dealt with a "unique" agreement partially resolving claims relating to the remediation of an industrial site, known as the B.F. Goodrich Superfund Site, in Calvert City, Kentucky.
The B.F. Goodrich Site was initially placed on the National Priorities List in 1983, and subsequent to the issuance of a first Record of Decision in 1988, the Site was expanded, the expansion including three chemical manufacturing plants that had been operated by Goodrich Corporation. These plants were subsequently sold to Westlake Vinyls and as part of the sale, Goodrich and Westlake each agreed to indemnify the other for any environmental cleanup costs associated with their own operations at the facility. PolyOne Corporation assumed Goodrich’s rights and responsibilities after a corporate spinoff in 1993.
Under a settlement agreement the parties entered into in 2007 resolving litigation over the allocation of costs at the site, once every five years either party could demand arbitration of which costs were allocable, but a separate provision allowed either party to file a complaint in federal court after the arbitration panel had issued its award, and the federal court was to treat the arbitration as if it never happened, with both parties prevented from introducing any evidence of the award (the “judicial relief provision”).
In 2017, PolyOne demanded arbitration of the allocable costs. Westlake then filed a cross-notice of arbitration. In response, PolyOne filed a complaint in federal district court, contending that the judicial relief provision was invalid under the Federal Arbitration Act (“FAA”) which otherwise limits the bases upon which a party can judicially challenge an arbitration award. Further, PolyOne contended that since severance of the judicial relief provision would materially alter the parties’ expectations when entering into the settlement agreement, all of the arbitration provisions should be stricken. PolyOne also requested an injunction to halt the then-pending arbitration. Westlake opposed the injunction request and filed a motion to dismiss. The district court denied PolyOne’s request for an injunction and granted Westlake’s motion to dismiss.
In reviewing PolyOne’s FAA argument, the Sixth Circuit reframed the question it was tasked with resolving as “when may a court vacate, modify, or correct an arbitration award under the FAA?” The Court found that the FAA provided limited instances where an arbitration award may be vacated or modified, and that the statutory language trumped any contractual agreement that parties might enter into.
The Court then turned to the question of whether all of the arbitration provisions became unenforceable. Westlake, seeking to preserve the arbitration agreement, argued that PolyOne had waived its ability to contest the applicability of arbitration by invoking the arbitration agreement itself. PolyOne argued, in turn, that a Tenth Circuit decision (Citizen Potawatomi Nation v. Oklahoma, 881 F.3d 1226, 1228 (10th Cir. 2018)) had resulted in a change in the law and that it had challenged the arbitration provision as soon as it learned of this decision. Further, PolyOne argued that, prior to this case, it would have been futile for it to seek a declaratory judgment on the legal question. The Sixth Circuit rejected this argument, holding that there had not necessarily been a change in law as much as a development of it. There was no prior negative caselaw that would have prevented the very challenge that PolyOne was seeking such that it would not have been futile for PolyOne to seek relief, as in fact the question was answered in favor of the party seeking relief in the Potawatomi case, disproving its futility.
PolyOne also requested that, even if it had waived its rights, the Sixth Circuit nonetheless strike the provisions as the Court should not enforce an illegal contract no matter the circumstances. The Court also rejected this argument, finding that any illegality to the contract was insufficiently grave and offensive to the rule of law to necessitate merits review.
Although the Sixth Circuit affirmed dismissal of PolyOne's complaint, it appears likely that it would have stricken the arbitration provisions had PolyOne not waived the challenge by invoking them. In essence, the Sixth Circuit would not allow PolyOne to have its cake and eat it too. Thus, the case should serve as a warning to entities to not sleep on their rights, and, on an even broader scale, not shy away from arguing new theories and creating new law.