The Federal Arbitration Act (FAA) validates agreements to arbitrate disputes, and the Supreme Court has read that broadly to establish a strong public policy in favor of arbitration, and to create a strong presumption in favor of arbitration where there are any doubts or ambiguities in an arbitration agreement. But a recent Eleventh Circuit case, Calderon v. Sixt Rent a Car, LLC, 5 F.4th 1204 (11th Cir. 2021), held that the FAA only validates arbitration agreements that arise out of the contract of which they are a part.
While most agreements to arbitrate only require that the parties arbitrate disputes that arise out of the contract, there has been a recent trend by some companies to include broad arbitration provisions requiring arbitration of any dispute between the parties, and in some cases even with affiliate companies. The Calderon decision, however, calls the validity of these broad provisions into question.
The Calderon Case
The plaintiff in Calderon used a popular website, Orbitz.com, to book a rental car in Florida from a rental company named Sixt Rent a Car. The Orbitz website terms of use, to which the plaintiff had agreed, contained an arbitration clause to arbitrate any disputes that arise out of the services offered by Orbitz. The plaintiff was satisfied with the Orbitz website and had no claims against that company.
He did, however, bring a claim against Sixt. He signed a separate agreement with Sixt concerning the car rental, and that, notably, lacked an arbitration clause. He alleged that he returned the rental car undamaged, but then was charged $700 for damage in an email sent thereafter. He brought a class action suit for breach of contract and under Florida consumer-protection statutes.
Seeking to avoid suit, Sixt moved to require arbitration of the claims, relying not on its own contract (which lacked an arbitration clause) but on the Orbitz agreement.
Analysis
Since all arbitration is a matter of contract, the Eleventh Circuit first turned to the contractual language. The Orbitz agreement required arbitration of any “Claims,” defined to include “any services or products provided.” Sixt argued that such included companies marketing their services through Orbitz, but the Eleventh Circuit held that the better reading was that this only meant services provided by Orbitz, not services provided by vendors through its site. Although it was not 100% clear, this was the better reading.
Sixt then invoked the Supreme Court’s holding that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). The Eleventh Circuit conceded that, if Moses H. Cone applied, it would indeed weigh in Sixt’s favor.
But the Calderon court held that the Moses H. Cone rule only applies to arbitration agreements within the scope of the FAA. The FAA language validates 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.” 9 USC 2 (emphasis added). The emphasized language focuses on disputes that “arise out of” the contract. “[T]he Act’s—or more accurately, Moses H. Cone’s—strong pro-arbitration canon of construction applies here only to the extent that Marin’s lawsuit against Sixt ‘[aris[es] out of’ his contract with Orbitz.”
In prior cases interpreting similar contractual language, the phrase “arises out of” turns on “whether the dispute in question was an immediate, foreseeable result of the performance of contractual duties.” The Calderon suit clearly failed this test, as it had little to do with the contractual relationship between Orbitz and the Plaintiff.
Citing to a concurrence in a prior Ninth Circuit case, the Eleventh Circuit agreed that the FAA simply does not apply to an agreement which does not “arise out of” the contractual relationship.
Implications
Although this issue has in the past only rarely come up, more recently companies have sought to broaden arbitration far beyond the scope of a contract. For example, in Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. 2020), the Ninth Circuit dealt with a dispute between a customer against a satellite-television company that was a distant affiliate of the wireless service company with whom the customer agreed to arbitrate disputes. The concurrence held that the FAA does not apply at all to that agreement.
These have been dubbed “infinite arbitration clauses” in a law review article, Horton, David, Infinite Arbitration Clauses, 168 U. Pa. L. Rev. 633, 643, 678–80 (2020), which discusses this new phenomenon and argues that the FAA does not apply where there is no nexus between the contract and the dispute.
It remains to be seen whether other courts will follow the Calderon court, but the plain language of the FAA seems to support its holding, as the FAA by its terms requires some nexus between the dispute to be arbitrated and the contract.
Other Enforcement Avenues
Even if the Calderon holding is accepted, there are two potential exceptions. First, the FAA itself also validates “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal [to perform].” Once parties have a dispute, they can agree to submit that to arbitration, and that agreement will be binding, even if the original contract lacked an arbitration clause. So, the limitation held in Calderon applies only to arbitration clauses in contracts that concern future disputes, not already-existing disputes.
Second, while the FAA does contain that limiting language, many states have their own arbitration statutes with language that differs from the FAA. Florida, where Calderon arose, provides in its arbitration statute that “[a]n agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.” Fla. Stat. § 682.02(1). That arguably would also exclude the dispute in Calderon, as the dispute between Plaintiff and Sixt was not “between the parties to the agreement,” which was only between the Plaintiff and Orbitz.
In contrast, New York law provides that “[a] written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable.” CPLR § 7501. California law has almost identical language, providing that “[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable.” Cal. Civ. Pro. § 1281. These provisions appear broader than the FAA, and arguably could validate an agreement that does not “arise out of” a contractual relationship.
Takeaways
For parties seeking to include arbitration clauses, particularly those used in standardized mass contracts, Calderon is a warning that the strong pro-arbitration policy of the FAA may not apply to validate that agreement, particularly as it related to disputes far afield from the contractual relationship.
Parties who seek to avoid arbitration should carefully review the relevant contracts and determine whether the dispute indeed “arises out of” the contractual relationship.
While most agreements to arbitrate only require that the parties arbitrate disputes that arise out of the contract, there has been a recent trend by some companies to include broad arbitration provisions requiring arbitration of any dispute between the parties, and in some cases even with affiliate companies. The Calderon decision, however, calls the validity of these broad provisions into question.
The Calderon Case
The plaintiff in Calderon used a popular website, Orbitz.com, to book a rental car in Florida from a rental company named Sixt Rent a Car. The Orbitz website terms of use, to which the plaintiff had agreed, contained an arbitration clause to arbitrate any disputes that arise out of the services offered by Orbitz. The plaintiff was satisfied with the Orbitz website and had no claims against that company.
He did, however, bring a claim against Sixt. He signed a separate agreement with Sixt concerning the car rental, and that, notably, lacked an arbitration clause. He alleged that he returned the rental car undamaged, but then was charged $700 for damage in an email sent thereafter. He brought a class action suit for breach of contract and under Florida consumer-protection statutes.
Seeking to avoid suit, Sixt moved to require arbitration of the claims, relying not on its own contract (which lacked an arbitration clause) but on the Orbitz agreement.
Analysis
Since all arbitration is a matter of contract, the Eleventh Circuit first turned to the contractual language. The Orbitz agreement required arbitration of any “Claims,” defined to include “any services or products provided.” Sixt argued that such included companies marketing their services through Orbitz, but the Eleventh Circuit held that the better reading was that this only meant services provided by Orbitz, not services provided by vendors through its site. Although it was not 100% clear, this was the better reading.
Sixt then invoked the Supreme Court’s holding that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). The Eleventh Circuit conceded that, if Moses H. Cone applied, it would indeed weigh in Sixt’s favor.
But the Calderon court held that the Moses H. Cone rule only applies to arbitration agreements within the scope of the FAA. The FAA language validates 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.” 9 USC 2 (emphasis added). The emphasized language focuses on disputes that “arise out of” the contract. “[T]he Act’s—or more accurately, Moses H. Cone’s—strong pro-arbitration canon of construction applies here only to the extent that Marin’s lawsuit against Sixt ‘[aris[es] out of’ his contract with Orbitz.”
In prior cases interpreting similar contractual language, the phrase “arises out of” turns on “whether the dispute in question was an immediate, foreseeable result of the performance of contractual duties.” The Calderon suit clearly failed this test, as it had little to do with the contractual relationship between Orbitz and the Plaintiff.
Citing to a concurrence in a prior Ninth Circuit case, the Eleventh Circuit agreed that the FAA simply does not apply to an agreement which does not “arise out of” the contractual relationship.
Implications
Although this issue has in the past only rarely come up, more recently companies have sought to broaden arbitration far beyond the scope of a contract. For example, in Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. 2020), the Ninth Circuit dealt with a dispute between a customer against a satellite-television company that was a distant affiliate of the wireless service company with whom the customer agreed to arbitrate disputes. The concurrence held that the FAA does not apply at all to that agreement.
These have been dubbed “infinite arbitration clauses” in a law review article, Horton, David, Infinite Arbitration Clauses, 168 U. Pa. L. Rev. 633, 643, 678–80 (2020), which discusses this new phenomenon and argues that the FAA does not apply where there is no nexus between the contract and the dispute.
It remains to be seen whether other courts will follow the Calderon court, but the plain language of the FAA seems to support its holding, as the FAA by its terms requires some nexus between the dispute to be arbitrated and the contract.
Other Enforcement Avenues
Even if the Calderon holding is accepted, there are two potential exceptions. First, the FAA itself also validates “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal [to perform].” Once parties have a dispute, they can agree to submit that to arbitration, and that agreement will be binding, even if the original contract lacked an arbitration clause. So, the limitation held in Calderon applies only to arbitration clauses in contracts that concern future disputes, not already-existing disputes.
Second, while the FAA does contain that limiting language, many states have their own arbitration statutes with language that differs from the FAA. Florida, where Calderon arose, provides in its arbitration statute that “[a]n agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.” Fla. Stat. § 682.02(1). That arguably would also exclude the dispute in Calderon, as the dispute between Plaintiff and Sixt was not “between the parties to the agreement,” which was only between the Plaintiff and Orbitz.
In contrast, New York law provides that “[a] written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable.” CPLR § 7501. California law has almost identical language, providing that “[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable.” Cal. Civ. Pro. § 1281. These provisions appear broader than the FAA, and arguably could validate an agreement that does not “arise out of” a contractual relationship.
Takeaways
For parties seeking to include arbitration clauses, particularly those used in standardized mass contracts, Calderon is a warning that the strong pro-arbitration policy of the FAA may not apply to validate that agreement, particularly as it related to disputes far afield from the contractual relationship.
Parties who seek to avoid arbitration should carefully review the relevant contracts and determine whether the dispute indeed “arises out of” the contractual relationship.