Prima Paint Corp. v. Flood & Conklin Manufacturing Co.

Last updated
Prima Paint Corp. v.
Flood & Conklin Mfg. Co.
Seal of the United States Supreme Court.svg
Supreme Court of the United States
Argued March 16, 1967
Decided June 12, 1967
Full case namePrima Paint Corp. v. Flood & Conklin Manufacturing Co.
Citations388 U.S. 395 ( more )
87 S. Ct. 1801; 18 L. Ed. 2d 1270
Case history
PriorDefendant's motion for stay to compel arbitration granted in district court; affirmed on appeal by Second Circuit; certiorari granted
Holding
Challenge to enforceability of contract must be decided by arbitrator when contract has arbitration clause unless challenge is to clause itself. Second Circuit Court of Appeals affirmed.
Court membership
Chief Justice
Earl Warren
Associate Justices
Hugo Black  · William O. Douglas
Tom C. Clark  · John M. Harlan II
William J. Brennan Jr.  · Potter Stewart
Byron White  · Abe Fortas
Case opinions
MajorityFortas
ConcurrenceHarlan
DissentBlack, joined by Douglas, Stewart
Laws applied
Federal Arbitration Act, 9 U.S.C.   § 1 et seq.

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), is a United States Supreme Court decision that established what has become known as the "separability principle" in contracts with arbitration clauses. [1] Following an appellate court ruling a decade earlier, it reads the 1925 Federal Arbitration Act (FAA) to require that any challenges to the enforceability of such a contract first be heard by an arbitrator, not a court, unless the claim is that the clause itself is unenforceable.

Contents

The case arose from a claim by a New Jersey manufacturer that a Maryland firm had misrepresented itself in a transaction and thus the contract between the two was unenforceable, precluding the arbitration agreed upon in the event of a dispute. Abe Fortas wrote for a 6-3 majority that the FAA was broad enough to require arbitration of all issues save the arbitration clause itself. Hugo Black's dissent called the majority's interpretation overbroad and at odds with Congressional intent in passing the law. He feared it would put legal matters in the hands of arbitrators with little or no legal understanding of it nor duty to follow the law.

In subsequent cases concerning the FAA, the Court has reaffirmed the separability principle and held that the FAA and this reading of it apply to arbitrable contracts under state law, even in cases where the contract is alleged to be illegal or state law provides for administrative dispute resolution. This has been seen as expanding the use of arbitration in contracts in the later 20th century, not only those between businesses but between businesses and consumers as well.

Background of the case

In the early 20th century, businessmen in New York began promoting the idea of legally binding arbitration to resolve disputes as a less costly alternative to litigation. Courts were hostile to the idea, especially in interstate commerce, so in 1925 arbitration advocates persuaded Congress to pass the Federal Arbitration Act (FAA), providing rules and a legal framework for arbitration. Among its provisions was a requirement that parties who had agreed to arbitrate do so before going to court.

The FAA made no impact on the federal courts until the 1958 Second Circuit decision in Robert Lawrence Co. v. Devonshire Fabrics, Inc., [2] which held that the requirement to arbitrate meant that any challenge to the contract itself had to go before an arbitrator, not just disputes over possible breaches of contract. Only the arbitration clause itself could be challenged in court first.

Instant dispute

Under this framework, in 1964 Prima Paint, of Maryland reached an agreement with Flood & Conklin, a New Jersey paint manufacturer, to purchase the latter's paint business for a percentage of receipts in annual payments of up to $225,000 over a six-year period. In return, Flood & Conklin agreed that its CEO, Jerome Jelin, would personally provide consulting services for Prima and that it would not sell to any of its former customers while the agreement remained in force. Two contracts governed the transaction; both had arbitration clauses.

One week after the contracts were executed, Flood & Conklin declared bankruptcy. In 1965, shortly before the first of its annual payments was due, Prima paid its first installment into an escrow account and told Flood's attorneys that it considered the consulting agreement breached. F & C responded with a notice of intent to arbitrate. Near the end of its permitted response period, Prima instead petitioned the Southern District of New York [3] to rescind the contracts and enjoin Flood & Conklin from arbitration. Since that company had represented itself as solvent during the negotiations only to go bankrupt shortly after signing the deal, Prima argued, the contracts had been fraudulently induced and thus the arbitration clauses by extension could not be enforced.

Litigation history

Flood & Conklin responded by denying the fraud allegations in several affidavits and noting that Prima had enjoyed the benefits of the contract for almost a year without complaint. It could not have been unaware of the bankruptcy proceedings, Flood noted, since it had been present at one of the creditors' committee meetings. [4]

The district court, citing Robert Lawrence, rebuffed Prima and ordered the parties to arbitration. An appeal to the Second Circuit was likewise unsuccessful. Since the First Circuit had reached a different conclusion in a similar case in 1960 [5] that the Supreme Court had declined to hear, [6] the Court accepted Prima's certiorari petition in order to resolve the issue.

Robert Herzog and Martin Coleman argued for the parties on March 12, 1967. The American Arbitration Association filed an amicus curiae brief in favor of Flood & Conklin.

Decision

Abe Fortas wrote for the six-justice majority, and John Marshall Harlan added a one-sentence concurrence saying that he believed Robert Lawrence was also applicable precedent. [7] Black was joined in a lengthy dissent by Potter Stewart and William O. Douglas, who had written for an eight-justice majority in Bernhardt v. Polygraphic Co , [8] an early reading of the Arbitration Act, which declined to compel arbitration in an employment contract on the grounds that the FAA applied only to contracts involving admiralty or commerce

Majority

After reiterating the case history, Fortas considered the case in light of Bernhardt. Since the consulting agreement was inexorably tied to the transfer of business assets from Flood to Prima, it was covered. "There could not be a clearer case of a contract evidencing a transaction in interstate commerce", he wrote, [9] responding to the dissent's suggestion that the language should be more narrowly interpreted. [10]

The language of Section 4 of the Act was clear, he continued, that only explicit challenges to the arbitration clause or its inducement were to be properly put before a court in the first instance. "[I]t is inconceivable that Congress intended the rule to differ depending upon which party to the arbitration agreement first invokes the assistance of a federal court." [11] Finally, he addressed the constitutionality of the Court's holding in light of Erie Railroad Co. v. Tompkins , [12] which held that the federal courts cannot create a federal common law and must defer to the prevailing state interpretations in substantive matters.

The question in this case, however, is not whether Congress may fashion federal substantive rules to govern questions arising in simple diversity cases. Rather, the question is whether Congress may prescribe how federal courts are to conduct themselves with respect to subject matter over which Congress plainly has power to legislate. The answer to that can only be in the affirmative. [13]

Dissent

Black's four-part dissent was longer than the majority opinion he responded to. He took issue with every aspect of Fortas's reasoning.

In his introductory paragraph, he was blunt:

The Court holds, what is to me fantastic, that the legal issue of a contract's voidness because of fraud is to be decided by persons designated to arbitrate factual controversies arising out of a valid contract between the parties. And the arbitrators who the Court holds are to adjudicate the legal validity of the contract need not even be lawyers, and in all probability will be nonlawyers, wholly unqualified to decide legal issues, and even if qualified to apply the law, not bound to do so. I am by no means sure that thus forcing a person to forgo his opportunity to try his legal issues in the courts where, unlike the situation in arbitration, he may have a jury trial and right to appeal, is not a denial of due process of law. I am satisfied, however, that Congress did not impose any such procedures in the Arbitration Act. [14]

He noted that Congress had explicitly not included in the FAA the language it normally used to apply to all commerce, leading him to doubt that the arbitration clause in the consulting agreement was covered by it. Nor did the Act provide as clear an answer as the majority claimed as to what sort of challenges to the formation or execution of the contract might necessarily be first heard by a court. And lastly the majority had not provided sufficient justification for its reading of Bernhardt and Erie Railroad. "The Court approves", he protested, "a rule which is not only contrary to state law, but contrary to the intention of the parties and to accepted principles of contract law — a rule which indeed elevates arbitration provisions above all other contractual provisions" [15]

His second and third sections went into great detail about the legislative history of the FAA, quoting from Montana Senator Thomas J. Walsh's statements about it during hearings and those of the American Bar Association's lobbyists, who had helped draft and pass it, suggesting that it was not meant to be interpreted as the majority and the Second Circuit had. He noted that New York's state Arbitration Act, on which the federal law was based, explicitly provided that a claim of misrepresentation in a contract with an arbitration clause was to be heard by a judge. "Thus, 35 years after the passage of the Arbitration Act, the Second Circuit completely rewrote it", in Robert Lawrence, whose reasoning the Court was now accepting. [16]

"If Prima's allegations are true," Black concluded,"the sum total of what the Court does here is to force Prima to arbitrate a contract which is void and unenforceable before arbitrators who are given the power to make final legal determinations of their own jurisdiction, not even subject to effective review by the highest court in the land." [17]

Legacy

Prima Paint established in federal jurisprudence what became known as the "separability" or "severability" principle in contracts with arbitration clauses, under which a legal fiction is created that the clause itself constitutes a contract separate from the underlying, or "container", contract. This is similar to the principle of compétence compétence in international arbitration, under which the arbitrator or arbitrators are presumed competent to decide the limits of their own jurisdiction.

Starting in the mid-1980s, the Court has greatly expanded the reach of Prima Paint in later cases. Since some of these have applied to the expanded use of arbitration clauses in contracts of adhesion between companies and consumers, some consumer advocates and legal scholars have criticized the decision as the inadvertent opening wedge of an assault on the right to litigate, and a weakening of state contract law and the Erie Railroad principle of deference to state common law. Defenders of the decision have responded that it simply began bringing the U.S. more in line with international arbitration practice, helping American companies compete in a global economy. One, Alan Rau, has also argued that it is justified not just by the Arbitration Act but by general principles of contract law.

Subsequent jurisprudence

The Court would not consider a case involving the FAA for another 17 years. When it did, in Southland Corp. v. Keating , [18] then-Chief Justice Warren Burger wrote for a 7-2 majority that not only upheld Prima Paint but held that the law applied to arbitration clauses in contracts executed under state law as well. Justices Rehnquist and O'Connor dissented, as they would in subsequent cases where the court upheld that decision.

That increased the use of such clauses, as well as legal challenges to them. In the 1990s and 2000s (decade), the Court has compelled arbitration even when the time frame to raise a claim is alleged to have lapsed, [19] the contract has been alleged to be illegal under state law [20] or where state law vested dispute resolution authority in a state agency. [21] Clarence Thomas was the lone dissenter from these two opinions, believing as Rehnquist and O'Connor did that the FAA does not apply to contracts executed under state law.

When it comes to contracts where one party disputed whether it had been properly formed, rather than the validity of a formed contract, the Court has been willing to let a court decide the issue. Justice Stephen Breyer wrote for a unanimous court in First Options v. Kaplan [22] that upheld a district-court decision reversing an arbitration award where it was not clear that the respondents had agreed to submit the arbitrability of the question to the arbitrator.

Commentary and criticism

Prima Paint attracted little analysis and commentary in its time, but as it became the foundation for the Court's expansion of the scope of the Arbitration Act and its subsequent application to contracts between consumers and businesses as well as among businesses, its reasoning has been the subject of more legal papers. Critics have reiterated Black's concerns in focusing on how the later decisions have exposed fundamental flaws in Prima Paint, while defenders have found them to reinforce its fundamental soundness.

Labor lawyer Zeb-Michael Curtin of the Minneapolis firm Dorsey & Whitney [23] says the Court "muddied the clear language of [the FAA]" and "enabled results contrary to the intentions of the framers of the FAA" by embracing the separability doctrine. [24] Richard Barnes of the University of Mississippi has argued that, contrary to Fortas's assertions, Prima Paint and its progeny have created fundamental problems with the Erie Railroad doctrine. "The FAA has become a substantive rule of a federal common law applied in virtually all settings and levels of the state and federal systems", he says. [25]

Richard Reuben of Missouri law school, a longtime critic of mandatory arbitration, calls Prima Paint's adoption of the separability doctrine "a perhaps unparalleled display of judicial sophistry". He fears it can have negative consequences for society as a whole: "By denying citizens the right to a day in court, arbitration imposed through mandatory processes and separability fosters cynicism and distrust in the rule of law, undermining its legitimacy." [26]

Defenders of the decision and separability have said that it is necessary for arbitration clauses to have any force, otherwise parties would be able to avoid them too easily by filing suits on any number of grounds. Those whose practice involves arbitrating disputes that are international in scope have credited it with bringing U.S. arbitration law closer to European norms, helping American companies compete and making the U.S. a viable venue for arbitration.

In several papers, Alan Scott Rau of the University of Texas law school has gone to a greater extent than Fortas did in grounding Prima Paint and the separability doctrine. He notes that challenges to the arbitration clause are often inseparable from the underlying claim, and that some public policy objectives may be better served by allowing the case to be heard by an arbitrator first. Conversely, he also notes that some challenges to a contract's formation necessarily include a challenge to the arbitration clause in any event, contrary to some recent lower-court decisions. [27]

See also

Related Research Articles

Arbitration, in the context of the law of the United States, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective evidence and legal arguments to a neutral third party for resolution. In practice arbitration is generally used as a substitute for litigation, particularly when the judicial process is perceived as too slow, expensive or biased. In some contexts, an arbitrator may be described as an umpire.

Federal Arbitration Act

The United States Arbitration Act, more commonly referred to as the Federal Arbitration Act or FAA, is an act of Congress that provides for judicial facilitation of private dispute resolution through arbitration. It applies in both state courts and federal courts, as was held in Southland Corp. v. Keating. It applies in all contracts, except contracts of seamen, railroad employees, or any other class of workers involved in foreign or interstate commerce, and it is predicated on an exercise of the Commerce Clause powers granted to Congress in the U.S. Constitution.

Arbitration clause

An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause. It is also known as the "Scott v. Avery clause."

Arbitration Method of dispute resolution

Arbitration, a form of alternative dispute resolution (ADR), is a way to resolve disputes outside the judiciary courts. The dispute will be decided by one or more persons, which renders the 'arbitration award'. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.

Preston v. Ferrer, 552 U.S. 346 (2008), was a decision by the Supreme Court of the United States holding that the Federal Arbitration Act ("FAA") overrules state laws declaring that certain disputes must be resolved by a state administrative agency.

Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), is a United States Supreme Court case concerning contract law and arbitration. The case arose from a class action filed in Florida against a payday lender alleging the loan agreements the plaintiffs had signed were unenforceable because they essentially charged a higher interest rate than that permitted under Florida law.

Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), was a United States Supreme Court case that held that state and federal courts cannot, on a motion to vacate or to modify an arbitration award, expand the limited scope of judicial review specified in 9 U.S.C. §§ 10 and 11, including terms that were agreed upon by the parties.

Southland Corp. v. Keating, 465 U.S. 1 (1984), is a United States Supreme Court decision concerning arbitration. It was originally brought by 7-Eleven franchisees in California state courts, alleging breach of contract by the chain's then parent corporation. Southland pointed to the arbitration clauses in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act (FAA) applied to contracts executed under state law.

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), commonly cited as Moses Cone or Cone Hospital, is a United States Supreme Court decision concerning civil procedure, specifically the abstention doctrine, as it applies to enforcing an arbitration clause in a diversity case. By a 6–3 margin, the justices resolved a complicated construction dispute by ruling that a North Carolina hospital had to arbitrate a claim against the Alabama-based company it had hired to build a new wing, even though it meant that it could not consolidate it with ongoing litigation it had brought in state court against the contractor and architect.

Arbitration in the United States is governed by the Federal Arbitration Act of 1925, which requires courts to compel parties who agree to arbitration to participate in binding arbitration, the decision from which is binding upon the parties. Since the passage of the FAA, both state and federal courts have examined arbitration clauses, as well as other statutes involving arbitration clauses, for validity and enforceability.

Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), was a United States Supreme Court case that concerned whether the "section one exemption" of the Federal Arbitration Act applied to an employment contract of an employee at Circuit City Stores. The Court held that the exemption was limited to the specific listing of professions contained in the text. This decision meant that general employment contracts, like the one Adams sued under, would have to be arbitrated in accordance with the federal statute.

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985), is a United States Supreme Court case concerning arbitration. It arose from an interlocutory appeal of a lower court's denial of brokerage firm Dean Witter Reynolds' motion to compel arbitration of the claims under state law made against it by an aggrieved former client. The Court held unanimously that the Federal Arbitration Act required that those claims be heard that way when the parties were contractually obligated to do so, even where parallel claims made under federal law would still be heard in federal court.

Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987), is a United States Supreme Court decision concerning arbitration of private securities fraud claims arising under the Securities Exchange Act of 1934. By a 5–4 margin the Court held that its holding in a 1953 case, Wilko v. Swan, that the nonwaiver provisions of the Securities Act of 1933 prevented the mandatory arbitration of such claims, did not apply to claims under the 1934 Act due to differences in the corresponding language of the two statutes, reversing a decision of the Second Circuit Court of Appeals that had affirmed what had been considered settled law, despite the lack of a precedent. It likewise held that claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) were arbitrable, affirming an order from the district court that the Second Circuit had also upheld.

14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), is a United States labor law case decided by the United States Supreme Court on the rights of unionized workers to sue their employer for age discrimination. In this 2009 decision, the Court decided that whenever a union contract "clearly and unmistakably" requires that all age discrimination claims under the Age Discrimination in Employment Act of 1967 be decided through arbitration, then employees subject to that contract cannot have those claims heard in court.

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), is a United States Supreme Court decision concerning arbitration of antitrust claims. The Court heard the case on appeal from the United States Court of Appeals for the First Circuit, which had ruled that the arbitration clause in a Puerto Rican car dealer's franchise agreement was broad enough to reach its antitrust claim. By a 5–3 margin it upheld the lower court, requiring that the dealer arbitrate its claim before a panel in Tokyo, as stipulated in the contract.

Wilko v. Swan, 346 U.S. 427 (1953), is a United States Supreme Court decision on the arbitration of securities fraud claims. It had originally been brought by an investor who claimed his broker at Hayden Stone had sold stock to him without disclosing that he and the firm were the primary sellers. By a 7–2 margin the Court held that the provisions of the Securities Act of 1933 barring any waiver of rights under that statute took precedence over the Federal Arbitration Act's (FAA) requirement that arbitration clauses in contracts be given full effect by federal courts. It reversed a decision to the contrary by a divided panel of the Second Circuit Court of Appeals.

Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477 (1989), is a United States Supreme Court decision concerning the arbitration of securities fraud claims. It was originally brought by a group of Texas investors against their brokerage house. By a 5–4 margin the Court affirmed the Fifth Circuit Court of Appeals and ruled that their claims under the Securities Act of 1933, which regulates trading in the primary market, must be arbitrated as stipulated in their customer agreements.

Disputes between consumers and businesses that are arbitrated are resolved by an independent neutral arbitrator rather than in court. Although parties can agree to arbitrate a particular dispute after it arises or may agree that the award is non-binding, most consumer arbitrations occur pursuant to a pre-dispute arbitration clause where the arbitrator's award is binding.

Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. ___ (2019), was a case decided by the Supreme Court of the United States on January 8, 2019. The case decided the question of whether a court may disregard a valid delegation of arbitrability—a contract provision stating that an arbitrator should decide whether a dispute is subject to arbitration—when the argument in favor of arbitration is "wholly groundless." In a unanimous (9-0) opinion written by Justice Brett Kavanaugh, the court sided with petitioner Henry Schein, Inc., holding that the "wholly groundless" exception to arbitrability violates the Federal Arbitration Act, and therefore a valid delegation of arbitrability should be honored even if a court believes the argument for arbitration to be "wholly groundless." It was Justice Kavanaugh's first Supreme Court opinion.

Am. Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013), is a United States Supreme Court case decided in 2013.

References

  1. ↑ McDougall, Andrew de Lotbiniére and Ioannou, Leon; "Separability Saved: US Supreme Court Eliminates Threat to International Arbitration" (PDF). Archived from the original (PDF) on 2011-07-20. (147 KB), Mealey's International Arbitration Report; March 2006; retrieved September 4, 2008.
  2. ↑ Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271F.2d402 , 411( 2d Cir. 1959).
  3. ↑ Venue was chosen since the contract stipulated arbitration would take place in New York City.
  4. ↑ Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 399 (1967).
  5. ↑ Lummus Co. v. Commonwealth Oil Ref. Co., 280F.2d915 , 923-24(1st Cir.1960).
  6. ↑ Lummus Co. v. Commonwealth Oil Ref. Co., cert. denied, 364 U.S. 911(1960).
  7. ↑ Prima Paint, 388 U.S. at 406, Harlan, J., concurring.
  8. ↑ Bernhardt v. Polygraphic Co., 350 U.S. 198 (1956).
  9. ↑ Fortas, Prima Paint, 388 U.S. at 401.
  10. ↑ Prima Paint, 388 U.S. 401 n.7.
  11. ↑ Prima Paint, 388 U.S. at 404.
  12. ↑ Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).
  13. ↑ Prima Paint, 388 U.S. at 405.
  14. ↑ Prima Paint, 388 U.S. at 407, Black, J., dissenting.
  15. ↑ Prima Pain, 388 U.S. at 411.
  16. ↑ Prima Paint, 388 U.S. at 412-424.
  17. ↑ Prima Paint, 388 U.S. at 425.
  18. ↑ Southland Corp. v. Keating , 465 U.S. 1 (1984).
  19. ↑ Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002).
  20. ↑ Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440 (2006)
  21. ↑ Preston v. Ferrer , 552 U.S. 346 (2008).
  22. ↑ First Options v. Kaplan , 514 U.S. 938 (1995).
  23. ↑ "Zeb-Michael Curtin". findlaw.com. 2007-12-22. Archived from the original on 2011-06-06. Retrieved 2008-09-26.
  24. ↑ "Rethinking Prima Paint separability in today's changed arbitration regime: the case for inseparability and judicial decisionmaking in the context of mental incapacity defenses". Iowa Law Review. University of Iowa. 2005-05-01. Retrieved 2008-09-26.
  25. ↑ Barnes, Richard; "Prima Paint Pushed Compulsory Arbitration Under The Erie Train" (PDF). Archived from the original (PDF) on 2014-01-06.; 2 Brook. J. Corp. Fin. & Com. L. 1, at 39, 2007; retrieved September 26, 2008.
  26. ↑ Reuben, Richard (2006-01-06). "When arbitration subverts democracy: by blocking access to the courts, mandatory arbitration and separability undermine the rule of law". Trial. American Association for Justice . Retrieved 2008-09-26.
  27. ↑ Rau, Alan Scott; Separability in the United States Supreme Court; October 24, 2006; retrieved September 27, 2008.
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