Rogers v. Swepi LP, No. 18-3229 (6th Cir. Dec. 10, 2018) [click for opinion]

In 2011, Matt Rogers entered into a lease agreement governing oil and gas extraction from Rogers’s five-acre property in Ohio (the “Agreement”) with SWEPI LP and Shell Energy Holding GP LLC (together, “Shell”). The Agreement provided that Rogers would receive a $5,000-per-acre signing bonus upon Shell’s verification of his good title to the property.

Rogers did not receive the signing bonus payment and sued for breach of contract on behalf of himself as well as other landowners who had similar agreements with Shell. Two provisions of the Agreement suggested that the dispute should be submitted to arbitration. Section Thirty-Three of the Agreement contained a broad arbitration clause (“[a]ny dispute which arises under this Lease … shall be resolved by binding arbitration….”). Section Eight stated that the “Lease shall become effective on the date that this Lease is signed by the Lessor” (Rogers’s signing of the Agreement was not contested). These two provisions were relied upon by Shell in arguing that the dispute over the Agreement should have been submitted to arbitration.

However, two other provisions of the Agreement suggested that the arbitration provision was part of a “second stage” of the Agreement. First, Section Twenty-Five provided that “[u]pon this Lease taking effect (thus, upon Lessor’s receipt of the bonus payment), Lessee’s obligations under this Lease shall not be diminished or affected by any title encumbrance on the Leased Premises….” (emphasis added). Second, Section Sixteen, containing the signing bonus clause, provided that “By Lessor’s signing this Lease, Lessor promises to proceed with this Lease and be bound thereby upon Lessee’s paying the full amount of the bonus payment.” (emphasis added). Both of these provisions suggested that the full terms of the Agreement, including, as argued by Rogers, the arbitration clause, were never triggered, since Shell never paid the bonus.

The district court found that since the bonus payment was not made, the “second stage” of the Agreement did not take effect, including the arbitration clause, and accordingly denied Shell’s motion to compel arbitration. Shell appealed to the Sixth Circuit. The parties also asked the appellate court to determine whether the Agreement allowed for class procedures in arbitration.

The panel first addressed the issue of whether a court or an arbitrator should decide on the arbitrability of the dispute, noting that the district court had “failed to address this threshold issue, jumping directly to the dispute itself.” Rogers argued that his attack on the arbitration clause was rooted in its formation, and therefore the dispute was properly decided by the district court rather than by an arbitrator. The panel disagreed, noting that Rogers did not dispute his signing of the Agreement, and therefore “there is no question regarding formation.” Attacks on the validity of an agreement to arbitrate, noted the panel, come “in two varieties: those that specifically challenge the validity of the arbitration clause, and those that challenge the validity of the contract as a whole.”

The panel opined that only attacks directed specifically at the agreement to arbitrate and its enforceability should be resolved by courts. Rogers’s argument “that much of the contract, which happens to include the arbitration clause, is unenforceable,” should therefore have been decided by an arbitrator, as it was not an attack specifically on the arbitration clause.

The panel further rejected Rogers’s argument that the Agreement was structured in two stages and concluded that the arbitration clause was triggered at signing. In doing so, the panel cited a line of cases elaborating the severability doctrine—going back to the 1967 Supreme Court decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co.—which hold that courts must enforce arbitration clauses within contracts, even if the contract itself is invalid or unenforceable.

Regarding the question about class arbitration, the panel noted that a party may not be compelled to submit to class arbitration unless the parties’ agreement “clearly and unmistakably” provides for it. Absent such clarity in the agreement, a dispute over whether a general arbitration agreement authorizes class action arbitration should be determined by a court. The panel, noting the “importance of this issue to the case, given that the class could include hundreds of Ohio landowners,” declined to decide this issue on appeal and remanded the case, instructing the district court to enter an order compelling arbitration and to decide the question of whether the Agreement allowed for class arbitration.

A version of this post originally appeared in the March 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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