Denying an injunction seeking to compel a non-signatory to arbitrate a fraud dispute, an Illinois federal court held that a court must decide whether a dispute is arbitrable unless a party can "clearly and unmistakably" show that the parties agreed to have an arbitrator determine arbitrability.

In Duthie v. Matria Healthcare, Inc., No. 07C5491, 2008 WL 482364 (N.D. Ill. Feb. 22, 2008), a Matria subsidiary merged with another entity. The detailed Merger Agreement contained a dispute resolution agreement, which mandated arbitration of certain disputes while requiring other disputes to be resolved in court. The parties also created an Escrow Fund to satisfy post-closing adjustments. The Merger Agreement stipulated that any disputes satisfied from the Escrow Fund would be resolved through binding arbitration.

Matria later filed arbitration claims against Duthie and Condron, alleging they made fraudulent misrepresentations and concealed material information relating to the merger. At arbitration, Duthie and Condron moved to dismiss arguing the arbitration panel lacked jurisdiction. The panel denied the motion and Duthie and Condron sought (1) a declaration asserting the fraud claims were not arbitrable and (2) a preliminary injunction barring Matria from proceeding with the arbitration claims. Matria countered by arguing that Duthie and Condron waived their right to challenge arbitrability because they had already unsuccessfully challenged arbitrability in arbitration and thus had to wait until the arbitration proceedings concluded before seeking judicial relief.

The Court rejected Matria's challenge that Duthie and Condron had waived their rights to challenge arbitrability. The Court found that Duthie and Cordon would avoid the time and expense of protracted arbitration by resolving arbitrability at this juncture of the dispute.

Further, the Court held that the question of arbitrability was for judicial determination unless the parties' agreement "clearly and unmistakably" provides otherwise. The Court reasoned that "clear and unmistakable" is analogous to a "clear and convincing" standard, signifying that the party seeking to deny a court the authority to determine arbitrability must meet a high evidentiary burden. Here, the arbitration agreement only provided for arbitration of certain disputes. Moreover, Matria failed to meet its heightened evidentiary burden because neither Duthie nor Condron signed the arbitration agreement.

Applying Delaware law, the Court found that although the parties' agreement mandated arbitration and referenced AAA rules, only those disputes that would be satisfied from the Escrow Fund were subject to arbitration. Because Matria sought to recover from Duthie and Condron personally, the Escrow Fund would not satisfy the judgment and therefore the dispute was outside the arbitration agreement's scope.