2014 Ohio 5778
Ohio Ct. App.2014Background
- Eight former Cornwell franchisees, led by David Bachrach, sued Cornwell alleging fraud, deceptive trade practices, consumer fraud, negligent misrepresentation, breach of fiduciary duty, and violations of Ohio’s Business Opportunity Law; they sought class relief on behalf of ~500 franchisees.
- Cornwell moved to stay proceedings and compel arbitration under the parties’ arbitration agreements; the trial court initially denied the stay and this Court reversed, holding the arbitrability question (scope) was for the court and the claims fell within the arbitration agreement.
- On remand a magistrate granted a stay pending arbitration; many individuals proceeded to and resolved claims in individual arbitrations. Cornwell later filed a counterclaim seeking (1) an injunction barring class arbitration and (2) a declaratory judgment that class arbitration is impermissible under the contracts.
- The magistrate recommended denying Bachrach’s motion to dismiss the counterclaim (saying the court should decide class arbitration issues); the trial court disagreed and dismissed the counterclaim, concluding that when an arbitration agreement is silent about class arbitration the arbitrator decides that question.
- Cornwell appealed (arguing the court should decide whether class arbitration is permitted); Bachrach cross-appealed seeking reinstatement of class litigation if the court enjoined class arbitration.
- The appellate court reversed in part: it held that when the contract is silent, the question whether arbitration may proceed as a class is a threshold issue for the court to decide (not the arbitrator); other Cornwell issues about vacating an arbitrator award were deemed moot; Bachrach may not litigate merits because the claims fall within the arbitration agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Who decides whether arbitration may proceed as class or individual when the agreement is silent? | Bachrach: the arbitrator decides (trial court correctly dismissed counterclaim). | Cornwell: the court must decide as a threshold question of arbitrability. | Court: issue is a threshold matter for courts; reversed trial court dismissal and vacated stay for limited purpose. |
| Whether the arbitrator’s clause-construction award permitting class arbitration should be vacated | Bachrach: dismissal of counterclaim was proper; arbitrator’s award stands. | Cornwell: trial court should have reached merits and vacated the award. | Moot on appeal because primary issue resolved in Cornwell’s favor; not addressed. |
| Whether claims may be litigated in court if arbitrable | Bachrach: if appellate court prevents class arbitration, plaintiffs should be allowed to litigate class claims under Civ.R. 23. | Cornwell: claims fall within arbitration agreement and must be arbitrated. | Court: prior holding that claims fall within arbitration agreement stands; plaintiffs may not litigate the claims. |
| Whether trial court erred procedurally in dismissing counterclaim without additional fact-finding | Bachrach: dismissal appropriate on legal grounds. | Cornwell: trial court erred by deciding arbitrability question for arbitrator and by not addressing vacatur. | Court reversed on legal issue (who decides); other procedural complaints rendered moot. |
Key Cases Cited
- Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (U.S. 1989) (arbitration is based on consent of parties)
- Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (U.S. 2010) (fundamental differences between bilateral and class arbitration)
- AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (U.S. 1986) (question of arbitrability is for courts)
- Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (U.S. 2002) (distinguishing gateway/threshold issues from procedural matters)
- BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (U.S. 2014) (use of presumptions to discern who decides threshold arbitration questions)
- Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013) (class-arbitration decision characterized as a threshold issue for courts)
- Cedar Fair, L.P. v. Falfas, 140 Ohio St.3d 447 (Ohio 2014) (arbitrator authority derives from parties’ contract)
- Academy of Medicine of Cincinnati v. Aetna Health, Inc., 108 Ohio St.3d 185 (Ohio 2006) (courts determine arbitrability)
- Hayes v. Oakridge Home, 122 Ohio St.3d 63 (Ohio 2009) (courts decide enforceability of arbitration agreements)