|
According to the Fifth Circuit Court of Appeals, a finding of fraudulent inducement in an entire contract during an arbitration proceeding does not render a severable confidentiality provision in that contract's arbitration agreement unenforceable.
In ITT Educational Services., Inc. v. Arce, No. 07-20438, 2008 WL 2553998, (5th Cir. June 27, 2008), Arce and 13 other former students at ITT's vocational school (collectively, the Arce claimants) initiated arbitration proceedings against ITT for fraudulent inducement. An arbitrator ultimately found for the Arce claimants. Later, Rodriguez – a former ITT student that was not a plaintiff in the Arce matter – filed a demand for arbitration on the same grounds.
The same attorney that represented the Arce claimants was retained to represent Rodriguez, and stated that she intended to introduce evidence and findings from the Arce proceeding at the Rodriguez proceeding. ITT sought and was granted declaratory relief at the trial court. The trial court enforced a confidentiality provision within the Arce-ITT arbitration agreement, prohibiting the subsequent disclosure of evidence and findings from that first proceeding.
On appeal, Rodriguez maintained that the arbitrator's determination that the entire Arce-ITT contract was fraudulently induced rendered the entire contract void, including the arbitration agreement and confidentiality provision. The Court disagreed, characterizing the arbitration agreement as severable from the other terms of the contract.
The Court found the confidentiality provision was part of the severable arbitration agreement, noting that the confidentiality provision was listed as a subparagraph under the arbitration agreement heading and was specifically referred to as an effective modification within the agreement. Furthermore, the Court cited prior case law for the proposition that confidentiality terms can be a part of arbitration agreements. See, e.g., Iberia Credit Bureau, Inc. v. Cingular Wireless, LLC, 379 F.3d 159, 163 (5th Cir. 2004) (noting the valid inclusion of confidentiality and severability provisions in an arbitration agreement).
According to the Court, a contrary holding would be illogical; if a court refused to sever an arbitration agreement and its provisions from the rest of such a contract, a finding of fraudulent inducement as to the entire contract would "in essence strip the arbitrator of the jurisdiction to make such findings."
Finally, the Court found ITT's permanent injunctive relief appropriate, observing that ITT would suffer irreparable, irreversible harm without an injunction, and there was no undue hardship in requiring Rodriguez to pursue his case in the same manner as any other litigant without the benefit of confidential information.
Subscribe to a free weekly update on ADR case law and
legislation
|