The Scope of the Arbitration Clause

U.S. Nutraceuticals and Cyanotech Corp. had a dispute over an arbitration clause in their agreement. The dispute  was over the scope of the arbitration clause, which had changed over the course of the parties’ history. In their initial agreement, all disputes were to be resolved through arbitration. The agreement was amended in 2010 when the two parties agreed that a breach of confidentiality was not going to be subject to arbitration. When U.S. Nutraceuticals sued Cyanotech for tortious interference and breach of confidentiality, Cyanotech become concerned about whether the dispute belonged in arbitration or in the court system. If the original agreement clause applied, the case would go to arbitration. If the amended agreement clause from 2010 applied, it would stay in the court system. A district court held that the amended clause applied and denied the motion to compel arbitration. Cyanotech appealed.

The 11th Circuit Court of Appeals found in favor of Cyanotech and remanded the case for an order compelling arbitration. The court said that since the parties’ arbitration clause incorporated the rules of the AAA, an arbitrator would be the one to decide whether the arbitration clause applied. In other words, the arbitrator would be the only one to decide the scope of an arbitration clause.

This case can provide many important lessons for individuals or companies involved in long-standings relationships with arbitration clauses written into their contracts. Below is a list of things to consider when you have arbitration clauses in your contracts:

  1. Pay careful attention to changes in arbitration clauses over time
  2. If there is a change in arbitration clauses, parties should agree on when the arbitration clauses take effect
  3. Negotiators should considering including language regarding who decides arbitrability.
  4. When pleading a dispute, consider whether claims fall within a particular arbitration clause

Source referenced: JD Supra (U.S. Nutraceuticals, LLC v. Cyanotech Corp.)

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