Lead Opinion
delivered the judgment of the court, with opinion.
Justice Wright specially concurred in the judgment and opinion.
Justice Holdridge dissented, with opinion.
OPINION
Plaintiffs, LRN Holding, Inc. (LRN), and David Ransburg, brought this declaratory judgment action against defendant, Windlake Capital Advisors, LLC, seeking a declaration that a contract entered into by the parties is void. As such, plaintiffs claimed they were entitled to recover fees associated with the sale of LRN. Defendant, Windlake Capital Advisors, LLC, moved to dismiss the action or, in the alternative, to stay the action and compel arbitration. The trial court granted defendant’s motion to stay the proceeding and ordered the matter to proceed to arbitration. Plaintiffs appeal from that order.
FACTS
Plaintiffs’ complaint alleges that they entered into a contract with defendant which stated that defendant would act as the exclusive brokerage agent seeking to secure a purchaser of the assets or stock of LRN. The contract called for plaintiffs to pay defendant a $35,000 engagement fee upon the signing of the contract and a success fee of “$200,000 + 2% of all consideration” upon the closing of the transaction.
Plaintiffs’ complaint acknowledges that defendant successfully brokered a transaction through which Robert Bosch Tool Corporation purchased LRN assets. Defendant received $1,226,340 in compensation for its services. The complaint contains no allegations suggesting defendant’s services were in any way inadequate or that the transaction somehow harmed plaintiffs.
Plaintiffs’ complaint alleges, however, that their contract with defendant should be declared void as defendant failed to properly register its services with the State of Illinois. As such, plaintiffs claim they are entitled to collect defendant’s $1,226,340 fee, as well as interest on those monies and attorney fees. Attached to the complaint is a photocopy of an “LLC File Detail Report” from the Illinois Secretary of State, the agreement between the parties, and photocopies of two pages associated with a “broker search” from the Illinois Secretary of State’s Web site.
Defendant never answered plaintiffs’ complaint but instead filed a “Motion to Dismiss or Stay Proceedings and to Compel Arbitration” pursuant to section 2 — 619 of the Code of Civil Procedure. 735 ILCS 5/2—619(a)(9) (West 2008). In its memorandum in support of its motion, defendant noted the agreement between it and plaintiffs contained an arbitration provision mandating that any controversy between the parties relating to this agreement shall be resolved by binding arbitration.
Defendant submitted that arbitration was mandated by both the Federal Arbitration Act (9 U.S.C. §1 et seq. (2006)) and the Illinois Uniform Arbitration Act (710 ILCS 5/1 et seq. (West 2008)). The trial court agreed and granted defendant’s motion to stay the proceedings and compel arbitration. Plaintiffs appeal.
ANALYSIS
The sole issue raised on appeal is whether the trial court erred when granting defendant’s motion. “[T]he decision whether to compel arbitration is not discretionary. Where there is a valid arbitration agreement and the parties’ dispute falls within the scope of that agreement, arbitration is mandatory and the trial court must compel it. [Citation.] *** On the other hand, where there is no valid arbitration agreement or where the parties’ dispute does not fall within the scope of that agreement, the trial court may not compel it. [Citation.] *** Accordingly, we will employ a de novo standard of review ***.” Travis v. American Manufacturers Mutual Insurance Co.,
While our standard of review is de novo, our supreme court has clearly indicated that when a trial court is “presented with a motion to stay litigation pending arbitration under section 3 of the FAA, the court’s inquiry is limited to whether an agreement to arbitrate exists and whether it encompasses the issue in dispute.” Jensen v. Quik International,
Plaintiffs make numerous arguments to support their claim that the trial court improperly compelled arbitration. The plaintiffs’ first argument centers on their assertion that no contract existed between them and defendant. As such, plaintiffs suggest, “Illinois case law clearly mandates that the court, and not an arbitrator, make the determination regarding whether a contract with an unlicensed professional is void.” Intertwined with this theory is plaintiffs’ assertion that the “Illinois Arbitration Act applies to this case, and requires that the court determine that the purported agreement is void, notwithstanding federal cases interpreting the Federal Arbitration Act.”
The gravamen of plaintiffs’ initial argument is that an Illinois statute renders the agreement between plaintiffs and defendant void ab initio. As such, no enforceable arbitration clause existed and, therefore, the trial court erred in compelling arbitration. To support this proposition, plaintiffs direct our attention to the Illinois Business Brokers Act of 1995 (Brokers Act) (815 ILCS 307/10—5.10 et seq. (West 2008)), Aste v. Metropolitan Life Insurance Co.,
Defendant disagrees with the plaintiffs, claiming even a broad challenge to the agreement as a whole must be decided in arbitration. To support its position, defendant cites to the Federal Arbitration Act (FAA) (9 U.S.C. §1 et seq.) and numerous cases that interpret it.
A. The Agreement, Brokers Act and FAA
The arbitration provision in the agreement between the parties reads as follows:
“Arbitration. Any controversy, dispute, or claim between the parties relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association, as amended from time to time. The parties agree that the venue for any such arbitration shall be Chicago, Illinois.”
Section 10 — 10 of the Brokers Act mandates that every “person engaging in the business of business brokering” register with the Illinois Secretary of State. 815 ILCS 307/10—10 (West 2008). It further notes that if “a business broker commits a material violation of Section 10 — 10, 10 — 20, or 10 — 30 of this Act, in connection with a contract for business brokering services, the contract is void, and the prospective client is entitled to receive from the business broker all sums paid to the business broker, with interest and any attorney’s fee required to enforce this Section.” 815 ILCS 307/10—60 (West 2008). Plaintiffs’ allegations that defendant is a business broker and never properly registered under the Brokers Act must be taken as true. See 735 ILCS 5/2—619 (West 2008); Fremont Compensation Insurance Co. v. Ace-Chicago Great Dane Corp.,
In Buckeye Check Cashing, Inc. v. Cardegna,
The Buckeye Court noted that section 2 of the FAA allows for challenges “ ‘upon such grounds as exist at law or in equity for the revocation of any contract’ ” which can take two forms. Buckeye,
“The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” Buckeye,
With this as its backdrop, the Buckeye Court went on to note:
“First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. *** [W]e conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court.” Buckeye,546 U.S. at 445-46 .
The Buckeye Court then noted that the Florida Supreme Court attempted to distinguish Prima Paint by relying “on the distinction between void and voidable contracts.” Buckeye,
Justice Scalia acknowledged that the Prima Paint “rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But, it is equally true that respondents’ approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum — and resolved it in favor of the separate enforceability of arbitration provisions. We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” Buckeye,
Two years after Buckeye, in Preston v. Ferrer,
The trial court in California denied the attorney/agent’s motion to compel arbitration and the California appellate court affirmed that ruling holding that relevant portions of the TAA vested “exclusive original jurisdiction” over the dispute in the Labor Commissioner. Ferrer v. Preston,
The Preston Court noted that a “recurring question under [section] 2 [of the FAA] is who should decide whether ‘grounds ... exist at law or in equity’ to invalidate an arbitration agreement.” Preston,
Similarly in the case at bar, LRN posits that the defendant’s unregistered status renders the entire contract void ab initio pursuant to the Brokers Act. LRN claims that, as such, it is for the trial court to determine whether any contract existed before the case can be submitted to arbitration pursuant to the arbitration agreement. We disagree.
LRN does not attack the arbitration agreement specifically; it seeks to invalidate the entire contract. The arbitration clause, similar to the clauses in Preston and Buckeye, notes that “any controversy, dispute, or claim between the parties relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association.” Clearly, pursuant to Buckeye and Preston, the dispute between the parties must proceed to arbitration.
Our supreme court seemingly acknowledged the Prima Paint “severability” principle in Jensen v. Quik International,
The Jensen court cautioned that when “parties choose arbitration in their contract, the party later seeking to avoid arbitration should not be allowed to do so by merely alleging that no contract exists” and that “almost any plaintiff can find some theory or claim upon which to allege that no contract existed, thereby avoiding arbitration.” Jensen,
B. The Illinois Uniform Arbitration Act
Plaintiffs also argue that the Uniform Arbitration Act (Arbitration Act), and not the FAA, applies to this matter and the Arbitration Act mandates we allow the trial court to determine the validity of the contract. Plaintiffs claim it is well settled that where parties to a contract have agreed to arbitrate in accordance with state law, the FAA does not apply even where interstate commerce is involved.
Plaintiffs note that section 2(a) of the Arbitration Act states that when an “opposing party denies the existence of the agreement to arbitrate,” a “court shall proceed summarily to the determination of the issue.” 710 ILCS 5/2(a) (West 2008). Plaintiffs claim that section 10 of the contract mandates the Arbitration Act and not the FAA applies to this matter. Section 10 states, “Governing Law. This Agreement shall be interpreted under and governed in accordance with the laws of the State of Illinois.”
Defendant claims plaintiffs have waived this matter by failing to raise it below. However, a review of plaintiffs’ “response in opposition to motion to dismiss or stay proceedings and to compel arbitration” indicates that plaintiffs, in fact, argued to the trial court that pursuant to “Section 2(a) of the Illinois Arbitration Act,” they were denying the existence of an agreement. We find that the plaintiffs have not waived this issue.
Plaintiffs are correct that courts have held where parties to a contract agree to arbitrate in accordance with state law, the FAA does not apply, even where interstate commerce is involved. See Tortoriello v. Gerald Nissan of North Aurora, Inc.,
Plaintiffs read Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University,
In Mastrobuono v. Shearson Lehman Hutton, Inc.,
The 2008 Preston case further clarified the Court’s holding in Volt. As noted above, Preston involved an attempt by one party to a contract to have a dispute over the validity of the contract settled, pursuant to California statute, by an administrative agency instead of through arbitration. Preston,
When one of the Preston parties demanded arbitration to settle the dispute, the other petitioned the California Labor Commissioner asking that the contract be declared void pursuant to the California Talent Agencies Act. Cal. Lab. Code §1700 et seq. (West 2003 & Supp. 2008); Preston,
The Court disagreed, noting:
“Ferrer’s reliance on Volt is misplaced for two discrete reasons. First, arbitration was stayed in Volt to accommodate litigation involving third parties who were strangers to the arbitration agreement. Nothing in the arbitration agreement addressed the order of proceedings when pending litigation with third parties presented the prospect of inconsistent rulings. We thought it proper, in those circumstances, to recognize state law as the gap filler.
Here, in contrast, the arbitration clause speaks to the matter in controversy; it states that ‘any dispute ... relating to ... the breach, validity, or legality’ of the contract should be arbitrated in accordance with the American Arbitration Association (AAA) rules. [Citation.] Both parties are bound by the arbitration agreement; the question of Preston’s status as a talent agent relates to the validity or legality of the contract; there is no risk that related litigation will yield conflicting rulings on common issues; and there is no other procedural void for the choice-of-law clause to fill.
Second, we are guided by our more recent decision in Mastro-buono [citation]. Although the contract in Volt provided for ‘arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association,’ [citation] (internal quotation marks omitted), Volt never argued that incorporation of those rules trumped the choice-of-law clause contained in the contract ***.
***
Preston and Ferrer’s contract, as noted, provides for arbitration in accordance with the AAA rules. [Citation.] One of those rules states that ‘[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part.’ [Citation.] The incorporation of the AAA rules *** weighs against inferring from the choice-of-law clause an understanding shared by Ferrer and Preston that their disputes would be heard, in the first instance, by the Labor Commissioner. Following the guide Mastrobuono provides, the ‘best way to harmonize’ the parties’ adoption of the AAA rules and their selection of California law is to read the latter to encompass prescriptions governing the substantive rights and obligations of the parties, but not the State’s ‘special rules limiting the authority of arbitrators.’ [Citation.]” Preston,552 U.S. at 361-63 .
Just as in Preston, the contract in this matter contained a generic state choice-of-law clause but also incorporated the AAA rules of arbitration. As such, we cannot find that the parties explicitly intended, by the mere inclusion of the generic choice-of-law clause, that disputes encompassed by the arbitration agreement be settled pursuant to the Uniform Arbitration Act. 710 ILCS 5/2(a) (West 2008).
CONCLUSION
In a nutshell, the plaintiffs agreed that “any controversy, dispute or claim between the parties relating to this agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association.” Certainly, the issue of whether or not the agreement is void ab initio is a “controversy, dispute, or claim between the parties relating to [the] agreement.” The law is clear; the issue must be arbitrated.
For the foregoing reasons, the judgment of the circuit court of Peoria County is affirmed.
Affirmed.
Concurrence Opinion
specially concurring:
Relying on Aste v. Metropolitan Life Insurance Co.,
It is important to remember that plaintiffs concede that interstate commerce is involved in this case and agrees the parties contemplated their contractual disputes would be resolved by an arbitration process.
When the parties dispute whether an arbitration clause or separate arbitration agreement was contemplated by the parties to become part of their agreement, then under Illinois law, the court must first decide if the parties actually agreed to resolve disputes by means of arbitration. Donaldson, Lufkin, & Jenrette Futures, Inc. v. Barr,
The contract at the heart of this appeal contains explicit language agreeing that the arbitration process would be controlled by the rules of the American Arbitration Association (AAA). Significantly, when the rules of the AAA are incorporated into a contract, as they were in this case, those same rules mandate that the parties to this contract “shall be deemed to have made these rules [of the AAA] a part of their arbitration agreement.” American Arbitration Ass’n, Commercial Arbitration Rules, R — 1(a) (eff. June 1, 2009). Thus, I find it very difficult to accept plaintiffs’ claim that the parties to this appeal agreed to arbitrate in accordance with Illinois law.
Further, the AAA rules, agreed to by plaintiffs, grant the arbitrator “the power to determine the existence or validity of a contract of which an arbitration clause forms a part.” American Arbitration Ass’n, Commercial Arbitration Rules, R — 7(b). These AAA rules, not state or federal law, require the arbitrator to separately consider the arbitration clause from other provisions of this contract. Also according to these rules, the arbitrator is given the authority to determine whether the contract is void and if so, then determine the continued validity of the arbitration clause. American Arbitration Ass’n, Commercial Arbitration Rules, R — 7(b).
The contract in this case provides not only that the arbitration process would be controlled by the AAA rules, but also that the proceedings would take place in Chicago. Obviously, based upon the contractual language at issue, we could not require the parties to travel to Peoria rather than Chicago for the arbitration hearing. Similarly, we cannot allow the court to first examine whether the contract in this case is void when the rules of the AAA, selected by the parties, require the arbitrator to first make this determination. In this appeal, we do not have a contract which is silent regarding whether the arbitration process will be governed by guidelines consistent with the Federal Arbitration Act (FAA) or will be governed by rules that may differ from the FAA.
Consequently, I respectfully suggest that we need not engage in a lengthy discussion explaining the relationship of the Illinois Arbitration Act to the FAA in order to resolve this appeal. Although, I agree with the majority’s analysis of the case law as discussed, I write separately to emphasize that the trial court, and now this court, have simply upheld the explicit contractual choices incorporated by the parties to this contract which provide the blueprint for the course of their dispute resolution. Here, as part of their contract, the parties specifically agreed that all disputes would be resolved through arbitration and, in turn, also agreed their arbitration proceedings would be controlled by the rules of the AAA.
For these reasons, I specially concur.
Notes
These circumstances are distinguishable from those considered by this court in Peterson v. Residential Alternatives of Illinois, Inc.,
Dissenting Opinion
dissenting:
I disagree with the majority’s holding that Buckeye Check Cashing, Inc. v. Cardegna,
It is well settled that an arbitration clause in an agreement entered into in contravention of an Illinois statute requiring a party to register with the state prior to engaging in any licensed activity does not divest Illinois courts of jurisdiction to hear claims that a party has violated the licensing statute. Aste v. Metropolitan Life Insurance Co.,
Moreover, the Kaplan court noted that not only the contract as a whole, but each of the clauses, including the arbitration clause, is void as against public policy where a party has failed to obtain a license required to protect the public from unlicensed practitioners. Kaplan,
Relying upon Buckeye Check Cashing, the majority finds that the arbitration clause contained in the parties’ agreement mandates that the question of whether the defendant was in compliance with the Brokers Act at the time it entered into the contract must be decided by an arbitrator. I disagree with the majority and take issue with its application of the holding in Buckeye Check Cashing to the facts in the instant matter. As the majority points out, in Buckeye Check Cashing, the Court held that the validity of a contract as a whole should “be considered by an arbitrator, not a court.” Buckeye,
What Buckeye Check Cashing does not address is what happens if the challenge is to both the contract as a whole and the validity of the arbitration clause. Such is the matter herein. Although the majority characterizes the plaintiffs’ complaint as seeking a declaration that the contract as a whole is void ah initio, the plaintiffs actually sought a declaration that the defendant had violated the Brokers Act and then sought all appropriate remedies under that statute. Under the Brokers Act, a contract for business brokerage services entered into by a nonlicensed broker is void, as is each provision of the agreement, including an agreement to arbitrate disputes under the putative agreement. Kaplan,
I would also find that Preston v. Ferrer is distinguishable from the instant matter in that Preston presented a specific factual question as to whether a California statute covering talent agents applied to the contract at issue. Preston,
In addition, there is nothing in the holdings of either Buckeye Check Cashing or Preston that overrules our supreme court’s guidance in Jensen v. Quik International,
Moreover, the instant matter is distinguishable from all other cases relied upon by the majority in that, here, the contract at issue is fully executed. The defendant has been paid in full for its services, and the plaintiffs raised no controversy, dispute or claim relating to the agreement. The only issue raised in the instant litigation was whether the defendant was a properly registered and licensed business broker under the Brokers Act. Based upon the pleadings, there was no question of fact as to whether the defendant was acting as a business broker. The only question was whether the defendant was properly registered as a business broker. The answer to that question is either a simple “yes,” in which case the litigation is at an end and the defendant is allowed to keep the fee it received under the contract, or a simple “no,” in which case the defendant must return the fees charged in violation of the Brokers Act and pay the plaintiffs’ attorney fees in bringing this action under the Brokers Act.
Because I would find that the matter of the defendant’s ability to render business broker services in Illinois is not a matter within the ken of an arbitrator, I would reverse the judgment of the circuit court of Peoria County compelling arbitration and I would remand this matter to the circuit court with direction that the defendant be ordered to answer the complaint. Depending upon the answer, the court should then enter an appropriate judgment forthwith.
I am somewhat perplexed by the defendant’s insistence in prolonging the litigation in this matter. The Brokers Act is very clear that strict compliance with the registration and licensing requirements of section 10 — 10 is required in order to engage in the practice of business brokering in this state. Either the defendant is in strict compliance with the Brokers Act or it is not, and it should answer the question forthwith so that this matter may be concluded in a judicious manner.