News & Events

Pro-Arbitration Trend Continues in the Sixth Circuit

The Sixth Circuit’s pro-arbitration march, which I noted in my last post, continues in PureWorks, Inc. v. Unique Software Solutions, Inc., No. 13-5115, an unpublished opinion.  The subject matter at issue was the arbitrability of earn-out covenants in an asset purchase agreement.  Unique Software sold its business to PureWorks in exchange for, among other things, an “earn out,” a payment linked to revenues from PureWorks’ operation of the business.  PureWorks was required to “operate and fund the business with a view toward maximizing revenues” consistent with Unique Software’s past practices.  PureWorks was also required to prepare regular earn-out reports.  In the event the parties were unable to resolve a dispute over items included in the earn-out report, the asset purchase agreement provided that they were to jointly engage an accounting firm to render a decision, which decision was to be binding on the parties and enforceable by a court.

When Unique Software alleged that PureWorks had violated the earn-out covenants, the district court ordered the parties to arbitrate, reasoning that, first, doubts about the scope of an arbitration agreement should be construed in favor of arbitration, and, second, that allegations that PureWorks had failed to comply with the earn-out covenants fell within the scope of the arbitration provisions in the asset purchase agreement.  The arbitration resulted in an award in Unique Software’s favor.

The Sixth Circuit affirmed the district court’s holding that operational issues fell within the scope of the arbitration agreement.  It first noted “the law’s strong presumption of arbitrability.”  Next, it stated that the asset purchase agreement provided broadly for “arbitration of disputes regarding the earn-out report,” and reasoned that operational disagreements affecting the earn-out report, including disputes about the performance of the earn-out covenants, qualified as disputes “regarding” the earn-out report.

In reaching this conclusion, the Sixth Circuit rejected PureWorks’ contentions that the parties intended to litigate, rather than arbitrate, all disagreements related to the performance of the earn-out covenants; that because the parties selected an accountant as their arbitration, the arbitrability of operational disputes was foreclosed; and that the absence of procedural guidelines for the arbitration established that the parties intended to arbitrate only accounting disputes.  The court also rejected PureWorks’ arguments concerning the timeline of the dispute resolution process and in favor of a narrow construction of the arbitration clauses.

Judge Stranch wrote a separate concurrence that addressed “the need for clear language in agreements governing the arbitration of business disputes.”  She went on to identify language relating to accounting arbitrations as potentially problematic and prone to litigation.  Judge Stranch identified two problems growing out of the language of accounting arbitration agreements: (1) whether the district court properly compelled arbitration, and (2) whether the arbitrator’s decision was within the scope of his or her authority.  The latter issue, she noted, is reviewed under “one of the narrowest standards of judicial review in all of American jurisprudence.  As long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” the court will affirm the arbitration award.  (Emphasis added.)  This reasoning drives home the deference that the Sixth Circuit has been recently been giving to the arbitration process.

Diana M. Comes