G3 Analytics, LLC v. Hughes Socol Piers Resnick & Dym Ltd.
67 N.E.3d 940
| Ill. App. Ct. | 2016Background
- Plaintiffs G3 Analytics (a Michigan LLC) and Ken Elder (Michigan resident) retained two Chicago law firms in Jan.–Mar. 2014 to investigate potential multi‑state False Claims Act qui tam matters and signed a written fee agreement.
- The fee agreement included: (1) a client‑withdrawal/fee clause; (2) a choice‑of‑law clause stating the agreement is governed by Illinois law “subject to the terms of the Alternative Dispute Resolution provision”; and (3) an ADR clause requiring mediation, then arbitration if mediation failed, with the mediator able to appoint an arbitrator (and to act as arbitrator).
- Plaintiffs terminated the firms in Aug. 2014; firms billed for time and costs. Plaintiffs refused to pay and refused mediation, suing for declaratory judgment that the fee agreement (and ADR clause) was unenforceable for various reasons (lack of arm’s‑length bargaining, unenforceable post‑termination, public‑policy/limited discovery, mediator self‑appointment).
- Defendants moved to dismiss and to compel arbitration under section 2‑619.1, arguing the Federal Arbitration Act (FAA) applies and an arbitrator must decide enforceability; defendants also challenged pleading sufficiency under Illinois procedural rules.
- The trial court found the choice‑of‑law clause was subordinated to the ADR clause, the agreement involved interstate commerce (Michigan parties, Illinois firms, potential multi‑state litigation), and thus the FAA governed; because plaintiffs attacked the contract as a whole, arbitrability belongs to the arbitrator. The court dismissed and compelled arbitration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Illinois law (Uniform Arbitration Act) or the FAA governs the ADR clause | Choice‑of‑law clause makes Illinois law govern the entire agreement, so courts must decide enforceability under the Illinois Arbitration Act | FAA governs because the agreement involves interstate commerce and the ADR provision is not covered by the choice‑of‑law clause | FAA governs the ADR provision; arbitrability decided under FAA rules |
| Whether the choice‑of‑law language covers the ADR provision | The blanket choice‑of‑law applies to whole contract, including ADR (citing Glazer’s, Yates) | Choice‑of‑law is expressly “subject to” the ADR provision, so ADR provision stands apart | “Subject to” language makes the choice‑of‑law subordinate to ADR; Illinois law does not automatically apply to ADR clause |
| Who decides validity when plaintiff attacks the entire contract (not arbitration clause alone) | Court should decide existence/enforceability of the contract before arbitration | Under FAA and Supreme Court precedent, disputes about the whole contract go to arbitrator | When validity attack targets the entire contract, arbitrator decides (Preston; LRN) |
| Whether FAA applies given interstate elements and ADR silence about governing law | Without explicit state‑law arbitration stipulation in ADR clause, apply Illinois law | FAA applies because parties are from different states and the agreement contemplated multi‑state federal/state claims (interstate commerce) | FAA applies to agreements involving interstate commerce absent clear state‑law arbitration clause |
Key Cases Cited
- Glazer’s Distributors of Illinois v. NWS‑Illinois, LLC, 376 Ill. App. 3d 411 (Ill. App. 2007) (choice‑of‑law clauses can apply to arbitration provisions when they plainly cover the entire agreement)
- Tortoriello v. Gerald Nissan of North Aurora, Inc., 379 Ill. App. 3d 214 (Ill. App. 2008) (arbitration in accordance with state law can preclude FAA application)
- Yates v. Doctor’s Associates, Inc., 193 Ill. App. 3d 431 (Ill. App. 1990) (similar principle on blanket choice‑of‑law clauses covering arbitration)
- LRN Holding, Inc. v. Windlake Capital Advisors, LLC, 409 Ill. App. 3d 1025 (Ill. App. 2011) (if the whole‑contract validity is challenged, arbitrability proceeds to arbitration under Preston)
- Preston v. Ferrer, 552 U.S. 346 (U.S. 2008) (under the FAA, arbitrators decide disputes about the validity of the contract unless challenge is to the arbitration clause specifically)
- Bovay v. Sears, Roebuck & Co., 2013 IL App (1st) 120789 (Ill. App. 2013) (FAA governs arbitration agreements involving interstate commerce)
- Engelstein v. Mintz, 345 Ill. 48 (Ill. 1931) (ordinary meaning of “subject to” is subordinate or limited by)