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Somerset Consulting, LLC, et al v. United Capital Lenders

November 15, 2011


The opinion of the court was delivered by: Dalzell, J.


Plaintiffs Somerset Consulting, LLC ("Somerset") and Charlotte Schmeling ("Schmeling") bring this action against defendants United Capital Lenders, LLC ("United"), Christopher Herghelegiu, and George Herghelegiu, alleging ten claims arising out of a consulting and referral agreement entered into between Somerset and United in April, 2008. Plaintiffs allege in duplicate -- on behalf of both Somerset and Schmeling, against all defendants -- claims for breach of contract, specific performance, accounting, and unjust enrichment, as well as for attorney's fees.

Defendants have filed a motion to dismiss plaintiffs' complaint and refer this matter to arbitration. Plaintiffs oppose that motion. For the reasons set forth below, we will grant defendants' motion to dismiss and direct the parties to arbitrate plaintiffs' claims before Judicial Arbitration and Mediation Services ("JAMS") in accordance with the parties' arbitration agreement.

I. Factual Background

A. The Standard for Motions to Compel Arbitration

At the threshold we confront a question regarding the proper standard to apply to the factual allegations in this matter. We also must deal with a dispute regarding the ripeness of defendants' motion for disposition.

Defendants assert their motion pursuant to Fed. R. Civ. P. 12(b)(1), (3), and (6), but explain that they "file[] this Motion to Dismiss pursuant to Rule 12(b)(6) and not Rule 12(b)(3) without waiving the right to do so pursuant to the dicta in various Third Circuit District Courts [that] have indicated that the appropriate vehicle to challenge a pleading based on an arbitration or forum selection clause is a Rule 12(b)(6) motion." Defs.' Mem. of L. in Supp. of Mot. to Dismiss ("Defs.' Mem.") at 5 n.3. Plaintiffs respond that "Motions to Compel Arbitration are reviewed under the standard for summary judgment as are found in Fed. Rule of Civil Procedure 56(c)[.] The court must examine all evidence presented by the party opposing arbitration and construe all reasonable inferences in that parties' [sic] favor."

Pls.' Resp. to Defs.' Mot. to Dismiss ("Pls.' Resp.") at 5. Plaintiffs further contend that "[b]efore the courts may resolve that issue [as to whether to compel arbitration in this case], the court must decide the validity of the arbitration provision and in this case that requires extensive discovery to provide This [sic] Court with the necessary information." Id. at 6.

We thus must decide whether to apply a motion to dismiss or summary judgment standard to defendants' motion to compel arbitration, as well as determine, in a related inquiry, whether plaintiffs are entitled to conduct discovery in this matter before we rule on defendants' motion. With respect to the applicable standard, each of the parties' positions finds support in the case law.

Our Court of Appeals explained in 2004 that "[o]ur prior decisions support the traditional practice of treating a motion to compel arbitration as a motion to dismiss for failure to state a claim upon which relief can be granted." Palcko v. Airborne Express, Inc., 372 F.3d 588, 597 (3d Cir. 2004) (citing Nationwide Ins. Co. v. Patterson, 953 F.2d 44, 45 n.1 (3d Cir. 1991)); see also Digital Signal, Inc. v. VoiceStream Wireless Corp., 156 Fed. Appx. 485, 487-88 (3d Cir. 2005) ("It is difficult for us to understand why the district court did not end its inquiry there and grant T-Mobile's Motion to Dismiss and Compel Arbitration."). But almost a quarter-century earlier, the Court of Appeals concluded that "when considering a motion to compel arbitration . . . [a district court] should give to the opposing party the benefit of all reasonable doubts and inferences that may arise," employing "the standard used by district courts in resolving summary judgment motions pursuant to Fed. R. Civ. P. 56(c)." Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 & n.9 (3d Cir. 1980). The Court of Appeals recently reiterated this earlier holding, stating that "[a] district court decides a motion to compel arbitration under the same standard it applies to a motion for summary judgment." Vilches v. The Travelers Companies, Inc., 413 Fed. Appx. 487, 490 (3d Cir. 2011) (internal quotation marks omitted).

As for Nationwide, 953 F.2d at 45 n.1 (citations omitted) -- the case cited in Palcko -- the Court of Appeals therein observed that "[d]ismissal of a declaratory judgment action because the dispute is covered by an arbitration provision is generally effected under Rule 12(b)(6) covering dismissals for failure to state a claim upon which relief can be granted, or Rule 56 covering summary judgments if matters beyond the pleadings were considered." See also Spinetti v. Service Corp. Int'l, 324 F.3d 212, 215 (3d Cir. 2003) (noting without criticism that the district court "converted the Appellee's Motion to Dismiss and Compel Arbitration into a Motion for Summary Judgment").

Our task, then, is to reconcile this jurisprudence, which at first glance appears complicated by the significant differences between Rule 12(b)(6) and Rule 56 standards. In considering a Rule 12(b)(6) motion to dismiss, the test "'is whether, under any reasonable reading of the pleadings, [the] plaintiff may be entitled to relief,'" Kundratic v. Thomas, 407 Fed. Appx. 625, 627 (3d Cir. 2011) (brackets in original) (quoting Holder v. City of Allentown, 987 F.2d 188, 194 (3d Cir. 1993)), and where "the defendant bears the burden of showing that no claim has been presented." Hedges v. U.S., 404 F.3d 744, 750 (3d Cir. 2005). To survive this test, "a complaint's 'factual allegations must be enough to raise a right to relief above the speculative level.'" Ideen v. Straub, 385 Fed. Appx. 123, 124 (3d Cir. 2010) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). On such a motion, we "'accept all factual allegations in the complaint as true and give the pleader the benefit of all reasonable inferences that can be fairly drawn therefrom,'" Ordonez v. Yost, 289 Fed. Appx. 553, 554 (3d Cir. 2008) (quoting Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993)), and "generally consider only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of a claim." Lum v. Bank of America, 361 F.3d 217, 221 n.3 (3d Cir. 2004)) (internal quotation marks omitted).

In contrast, under Rule 56(a) "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law," where "[a] party asserting that there is a genuine dispute as to a material fact must support that assertion with specific citations to the record." Bello v. Romeo, 424 Fed. Appx. 130, 133 (3d Cir. 2011). In evaluating a Rule 56 motion, we "'must draw all reasonable inferences in favor of the nonmoving party, and [we] may not make credibility determinations or weigh the evidence.'" Eisenberry v. Shaw Bros., 421 Fed. Appx. 239, 241 (3d Cir. 2011) (quoting Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000)). The Supreme Court has explained that entry of summary judgment is appropriate only if the parties are given "adequate time for discovery." Celotex Corp., 477 U.S. at 322.

Both the burden on the non-moving party and the documents available to that party thus differ significantly under the motion to dismiss and summary judgment standards. In applying the motion to dismiss standard, the defendant need only shoulder a single burden -- to show that the complaint fails to state a claim -- but under a summary judgment standard a burden-shifting framework applies: "[t]he moving party bears the initial burden of showing that the non-movant has failed to establish one or more essential elements of its case," upon which "the non-movant must go beyond the pleadings and come forward with specific facts indicating a genuine issue for trial." Connection Training Servs. v. City of Phila., 358 Fed. Appx. 315, 318 (3d Cir. 2009) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986)). In defending a motion to dismiss for failure to state a claim, a plaintiff can rely only on the complaint and selected other documents, while in responding to a motion for summary judgment a non-movant may cite "to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials." Rule 56(c)(1)(A). Here, the plaintiffs appear to welcome the burden that a summary judgment standard would impose upon them because they seek the discovery -- and the corresponding freedom to cite to the record -- that they would be entitled to under that standard.

It is thus important that we decide which standard to apply to defendants' motion to compel arbitration. Nationwide's reconciliation of the standards -- that such motions should be considered "under Rule 12(b)(6) covering dismissals for failure to state a claim upon which relief can be granted, or Rule 56 covering summary judgments if matters beyond the pleadings were considered," 953 F.2d at 45 n.1 -- while certainly accurate, assists us little in our particular inquiry. We must determine whether plaintiffs are entitled to conduct discovery and then to cite to "matters beyond the pleadings," id., in responding to defendants' motion to compel arbitration.

To identify which standard applies, we will consider four sources of authority: (1) the procedure that the Act establishes for determining whether a motion to compel arbitration should be granted; (2) the role that applicable precedent envisions for discovery; (3) case law on the use of arbitrability by defendants to challenge the viability of a complaint; and (4) the purposes that courts have articulated as motivating enactment of the FAA.

The FAA provides, at 9 U.S.C. § 2, that A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

Section 4 explains the procedure that a court should follow in ruling upon a motion to compel arbitration:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. . . . 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. . . . If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

This Section is thus equivocal as to the standard a court should apply in resolving a motion to compel arbitration, requiring only that the court "hear the parties" and compel arbitration if "the making of the agreement for arbitration . . . is not in issue."

Decisions from our Court of Appeals and the Supreme Court suggest that parties may have some limited right to discovery before a court rules on a motion to compel arbitration. In Blair v. Scott Specialty Gases, 283 F.3d 595, 608-09 (3d Cir. 2002), our Court of Appeals discussed the Supreme Court's decision in Green Tree Fin. Corp. -- Alabama v. Randolph, 531 U.S. 79 (2000), explaining that

Green Tree established the right of a claimant to invoke discovery procedures in the pre-arbitration proceeding in order to assist the claimant in meeting her burden of showing the likelihood of bearing prohibitive costs. Although discovery is ordinarily not undertaken at such an early stage of a proceeding that is governed by an arbitration agreement, there is language in the Supreme Court's opinion faulting the claimant for not presenting evidence "during discovery." Green Tree, 531 U.S. at 92, 121 S. Ct. 513. Additionally, the EEOC cites an interchange during oral arguments before the Supreme Court that indicates that the Supreme Court assumed that discovery was available. Br. of EEOC at 12. Without some discovery, albeit limited to the narrow issue of the estimated costs of arbitration and the claimant's ability to pay, it is not clear ...

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