ARBITRATION: “Zombie clause” lives following termination of underlying agreement for claims that “arise under” it, not for others, as determined by Complaint factual allegations rather than legal causes… Molloy.
Aviation Alliance contracted in 2009 with Polaris Enterprise Group under a Master Service Agreement for administrative, underwriting, and support services. AA sued Polaris in 3/17 alleging 9 causes relating to and following termination of their relationship in 10/16, claiming that it used confidential and trade secret information to make misrepresentations to shareholders and sell AA policy holders policies provided by other carriers, unlawfully replacing at least 49 policies with insurance issued by other companies with a resulting loss in excess of $758,000 of premium. Polaris, which has not yet filed an answer, seeks to compel arbitration pursuant to a clause in the Master Service Agreement requiring arbitration of “any dispute, claim or controversy arising out of or relating to this Agreement.” The question is whether this clause died with the Agreement or whether it, like a zombie, continues to come to life ever after the death of the Agreement. AA — drafter of the Agreement — argues that it died with the contract; Polaris insists that it survived. Both parties are partially correct. To the extent that AA’s claims arise under the 2009 Agreement, they remain subject to the zombie arbitration provision post-expiration. Litton (US 1991) (an “extensive obligation to arbitrate” would not be consistent “with an interpretation that would eliminate all duty to arbitrate as of the date of [the contract’s] expiration.”). The duty to arbitrate under the 2009 Agreement did not terminate with the Agreement. Id. (“We presume as a matter of contract interpretation that the parties did not intend a pivotal dispute resolution provision to terminate for all purposes upon the expiration of the agreement.”). The zombie clause is therefore alive, but for what?
Although “the phrase `arising under’ in an arbitration agreement is interpreted narrowly,” “when parties intend to include a broad arbitration provision, they provide for arbitration `arising out of or relating to’ the agreement.” Cape Flattery (9th Cir. 2011). The language of the clause here is broad as it includes claims both “arising out of” and “relating to” the Agreement. Polaris insists that because of the broad language, arbitration is required for all claims. However, while termination of the 2009 Agreement in 10/16 did not terminate the duty to arbitrate, it limited the scope of post-expiration arbitration. The presumption in favor of post-expiration enforcement of arbitration agreements “is limited to disputes arising under the contract.” Litton. In determining whether a claim falls within the scope of the arbitration agreement, courts focus on the factual allegations in the complaint rather than the legal causes asserted. Mitsubishi (US 1985). AA brings 9 common law and statutory claims against Polaris based on the same central factual allegations, but the zombie clause itself does not have 9 lives. The dispute is arbitrable if it involves facts or occurrences that pre-date termination, infringes on rights vested or accrued under the agreement, or survives under normal contract principles. Litton. The parties did not assess arbitrability in the context of the independent causes. Doing so, arbitration is required for Counts II, III, IV, V, and XI.
Count I (tortious interference). This is based on interference with 3rd-party contracts, not the AA/Polaris Agreement. It alleges activity that occurred after contract termination in 10/16 and raises issues that “are predominantly unrelated to the central conflict over the interpretation and performance of the Agreement.” Mediterranean (9th Cir. 1983). The alleged interference could have been “accomplished even if the Agreement did not exist.” Id.Count I is not subject to arbitration.
Counts II & III (trade secrets) and Count IV (conversion). Both the propriety of acquisition and the duties related to the trade secrets and confidential information arise from the 2009 Agreement. Although AA’s claims are based on statutory causes for misappropriation that occurred primarily after contract termination, they require interpretation or application of the Agreement. Similarly, Polaris’s possession and use of the information was governed by the 2009 Agreement and a claim for conversion requires “unauthorized dominion.” Eatinger (Mont. 1984). Keeping in mind that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration,” Moses (US 1983), Counts II, III, and IV are subject to arbitration.
Count V (breach of fiduciary duty and duty of loyalty. Because these duties were created by the 2009 Agreement and have no independent basis, they fall within the scope of the arbitration clause. AA’s conclusory argument to the contrary is not persuasive.
Count VI (unfair competition) and Count VII (defamation). AA alleges that Polaris, “in soliciting and replacing [AA] policies used, in commerce, false or misleading descriptions of fact or false or misleading misrepresentations of fact which misrepresented the nature of qualities of [AA]’s goods, services or commercial activities constituting unfair competition” and defamation. Much like its claims for tortious interference, these causes do not concern rights that vested or accrued under the 2009 Agreement or during the Agreement. Because they do not “arise under” the Agreement, they are not subject to arbitration.
Count VIII (unjust enrichment). AA alleges that by retaining and continuing to use confidential information following termination of their relationship, Polaris was unjustly enriched. Inherent in unjust enrichment is absence of an express contract. Pruyn (Mont. 2009). Because AA’s allegations involve conduct that post-dates the Agreement’s termination and equitable relief distinct from that provided by the Agreement, Count VIII is not subject to arbitration.
Count IX (punitives). Absent contractual language limiting an arbitrator’s power based on state law, punitives may be subject to arbitration under federal law. Mastrobuono (US 1995). A plaintiff must show “actual fraud or actual malice.” MCA 27-1-221(1). AA pleads only actual malice. A finding of actual malice related to arbitrable conduct is not foreclosed by the pleadings. Thus Count IX is subject to arbitration to the extent that the conduct arose under the Agreement.
Resolution of AA’s non-arbitrable claims is stayed pending arbitration of the arbitrable issues.
Polaris seeks fees pursuant to the arbitration provision that “the party seeking enforcement shall be entitled to an award of all costs, fees, and expenses, including attorneys’ fees, to be paid by the party against whom enforcement is ordered.” While such recovery is complicated by expiration of the Agreement, the fee provision remains enforceable consistent with the general federal policy in favor of arbitration. Ajida (Cal. App. 2001). To the extent that it prevailed, Polaris is entitled to fees & costs associated with bringing the present motion. Of the 9 claims, arbitration is required for 5 (including punitives, which are limited to arbitrable conduct). Accordingly, it shall recover half its fees, costs, and expenses associated with the present motion.
Aviation Alliance Insurance Risk Retention Group v. Polaris Enterprise Group, 44 MFR 90, 6/27/17.
Martin Rogers & Ronald Bender (Worden Thane), Missoula, for AA; Andrew White (O’Brien Law Office), St. Helena, Calif., and Randy Cox & John Newman (Boone Karlberg), Missoula, for Polaris.
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