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Responding to a Federal Court Complaint When There is an Agreement to Arbitrate
Courts are All Over the Map Douglas W. Lytle Klinedinst PC Howard J. Klatsky Fee, Smith, Sharp & Vitullo, LLP
American employers are, in a reported trend driven by a number of Supreme Court decisions dating back to the early 1990s, increasingly requiring workers to sign mandatory arbitration agreements. According to one commentator, by the early 2000s the percentage of workers subjected to mandatory arbitration had risen from just over 2% (in 1992) to almost a quarter of the workforce. Since that time, workers subject to mandatory arbitration provisions has more than doubled, now exceeding 55%. Given all of this, one might think that in the year 2021, the law would be clear on what federal procedure applies when a defendant is moving to dismiss or stay a case and compel arbitration pursuant to an agreement to arbitrate. Not so. In fact, the federal courts are all over the map. In McDonnel Grp., L.L.C. v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427, 430 n.5 (5th Cir. 2019), the Fifth Circuit reiterated that it has not yet decided whether, under the Federal Rules of Civil Procedure (FRCP), a dismissal based on an arbitration provision is a dismissal for lack of subject matter jurisdiction under FRCP Rule 12(b)
(1) or a dismissal for improper venue under Rule 12(b)(3). The Northern District of Texas, however, seems pretty certain that Rule 12(b) (3) is the correct basis for a motion to dismiss or stay an action based on an arbitration agreement. Recent rulings by Northern District of Texas courts find that an arbitration clause implicates forum selection and claims-processing rules and thus, such motions are governed by Rule 12(b) (3) rather than Rule 12(b)(1). Predmore v. Nick’s Mgmt., 2021 U.S. Dist. LEXIS 22123, at *3 (N.D. Tex. Feb. 4, 2021); see also, Gezu v. Charter Communs., 2021 U.S. Dist. LEXIS 23692, at *23 (N.D. Tex. Jan. 7, 2021). In Neutra, Ltd. v. Terry (In re Acis Capital Mgmt., L.P.), 604 B.R. 484, 514-16 (N.D. Tex. 2019) (“Neutra”), the Northern District of Texas explained why Rule 12(b) (3) applies when a party seeks to stay or dismiss a pending lawsuit and compel arbitration. Challenging the denial of its motion to compel arbitration, Neutra Ltd. argued that arbitration agreements implicate the court’s subject matter jurisdiction. It relied on Gilbert v. Donahoe, 751 F.3d 303 (5th Cir.
2014), in which the Fifth Circuit held, “a district court lacks subject matter jurisdiction over a case and should dismiss it pursuant to Federal Rule of Civil Procedure 12(b)(1) when the parties’ dispute is subject to binding arbitration.” The court in Neutra noted that before Gilbert, the Fifth Circuit had not definitively decided whether Rule 12(b)(1) or Rule 12(b)(3) was the proper rule. It then pointed to an order by a Fifth Circuit panel denying a petition for rehearing in Ruiz v. Donahoe, 784 F.3d 247 (5th Cir. 2015), wherein Circuit Judge Owen—who had authored the opinion in Gilbert just one year before—wrote “[a]lthough in Gilbert we spoke in terms of subject-matter jurisdiction, we used the term imprecisely.” In Ruiz, the Fifth Circuit explained that subject matter jurisdiction can be raised at any time and cannot be waived by the parties, whereas contractual arbitration provisions are waivable and do not affect subject matter jurisdiction. Accordingly, under Ruiz, “agreements to arbitrate implicate forum selection and claims-processing rules not subject matter jurisdiction.”
