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A federal court in Minnesota ruled that the Federal Arbitration Act (FAA) applied to a joint venture agreement whereby a Connecticut company provided services to a dry cleaning business in Minnesota. Accordingly, the Court ordered arbitration of all claims, including the Minnesota company's allegation that the agreement was void.
In DSAI, Inc. v. Market Direct, LLC, No. 06-4545, 2007 WL 551614 (D. Minn. Feb. 21, 2007), DSAI and Market Direct entered into a joint venture agreement whereby Market Direct would provide marketing services to DSAI's dry cleaning business.
When the business relationship fell apart, DSAI sued Market Direct and its principal, Andrew Appelbaum. Market Direct and Appelbaum filed a motion to compel arbitration pursuant to an arbitration clause in the joint venture agreement.
In opposing the motion, DSAI argued that the joint venture agreement was void under the Minnesota Franchise Act. This argument required the Court to determine whether the FAA applied to the joint venture agreement because under the FAA, a challenge to the contract as a whole is a matter for the arbitrator.
As the Court explained, the Supreme Court has construed the FAA as a full exercise of the Congress' Commerce Clause, meaning that the "involving commerce" requirement of the FAA is satisfied "if in the aggregate the economic activity in question would represent 'a general practice . . . subject to federal control.'" Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 57 (2003).
Applying this standard, the Court held that the FAA applied to the joint venture agreement because it involved a business relationship in which DSAI, a Connecticut company, provided services to a business in Minnesota. Given the applicability of the FAA, DSAI's claim that the agreement was void presented a question for the arbitrator because it challenged the contract as a whole rather than just the arbitration clause. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).
In opposing arbitration, DSAI also argued that the claims against Appelbaum were not subject to arbitration because he was not a signatory to the joint venture agreement. The Court rejected this argument for two reasons. First, the Court ruled that the claims against Appelbaum were subject to arbitration because they were based on his conduct as a principal of Market Direct. Second, even if the claims against Appelbaum were not subject to arbitration, Eighth Circuit precedent permits a court to stay any non-arbitrable claims pending arbitration of any claims subject to arbitration.
As this case illustrates, the FAA has expansive reach. Also, while the required showing is minimal, parties can eliminate the need to demonstrate an aggregate impact on interstate commerce by stipulating that the transaction involves interstate commerce. See Pest Management, Inc. v. Langer, 96 Ark. App. 220 (Ark. Ct. App. 2006), aff'd, 2007 WL 538178 (Ark. Feb. 22, 2007). Under Rule 48B of the National Arbitration Forum Code of Procedure, the FAA applies to all arbitration agreements unless the parties agree otherwise.
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