Mercadante v. Xe Services, LLC, 78 F. Supp. 3d 131

Background

Four former Blackwater security contractors (Plaintiffs) sued XE/Blackwater alleging misclassification as independent contractors and related claims (breach of contract, ERISA fiduciary duty, fraud).
Each plaintiff signed an Independent Contractor Service Agreement (ICSA) containing an arbitration clause incorporating the American Arbitration Association (AAA) rules; some plaintiffs also signed later engagement schedules that incorporated the ICSA.
The AAA Employment Rules delegate questions of arbitrability to the arbitrator (Rule 6).
Defendants moved to compel arbitration; the court ordered limited discovery on contract formation and additional briefing regarding delegation and North Carolina unconscionability law.
The central legal question was whether the parties clearly and unmistakably delegated arbitrability to an arbitrator and whether that delegation agreement is itself enforceable under North Carolina law.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether arbitrability was delegated to an arbitrator	Incorporation of AAA rules is insufficient to clearly and unmistakably delegate arbitrability; some contract language (DBA sentence) undermines delegation	The ICSA’s arbitration clause expressly incorporates AAA rules, which clearly and unmistakably delegate arbitrability	Court: Incorporation of AAA rules is clear and unmistakable; delegation to arbitrator established
Whether plaintiffs actually agreed to the ICSA/delegation (meeting of minds)	Plaintiffs contest formation facts and assert defenses (fraud, duress, unilateral mistake)	Defendants rely on signed ICSAs and incorporation by reference; delegation clause severable under FAA	Court: Plaintiffs’ formation/contention challenges do not invalidate the delegation clause; threshold formation disputes do not defeat delegation absent challenge to delegation itself
Validity of delegation clause (fraud, duress, mistake, unconscionability)	Alleged fraud, economic duress, unilateral mistake about contract nature, and unconscionability (high arbitration costs/fee-shifting) render delegation invalid	Delegation clause is severable and must be attacked specifically; North Carolina law (and Torrence/Concepcion) foreclose unconscionability based solely on arbitration costs; plaintiffs failed to target the delegation clause in most defenses	Court: None of the defenses invalidate the delegation provision; only unilateral mistake and unconscionability directly addressed but fail as a matter of NC law
Remedy after compelling delegation (stay vs dismissal)	Not argued as primary; plaintiffs would oppose premature dismissal	Defendants sought arbitration enforcement; dismissal might be appropriate if all claims ultimately arbitrable	Court: Stay the action pending arbitrator’s decision on arbitrability; dismissal would be premature now and may be sought later if arbitrator deems all claims arbitrable

Key Cases Cited

Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (parties can delegate arbitrability; court must decide challenges to delegation clause itself)
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (gateway questions of arbitrability are for arbitrator if parties clearly and unmistakably agree)
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (who decides arbitrability depends on parties' agreement)
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (arbitration provision severable from contract challenges to contract as a whole)
Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1 (FAA creates federal substantive law of arbitrability)
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (arbitration-specific defenses that single out arbitration may be preempted)
Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (high cost of vindicating statutory rights in arbitration does not invalidate arbitration agreement)
Torrence v. Nationwide Budget Finance, 753 S.E.2d 802 (N.C. App. decision analyzing unconscionability post-Concepcion under North Carolina law)