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In vacating both an order compelling arbitration and a subsequent order confirming the award, the Ninth Circuit Court of Appeals held that the trial court erred in ordering arbitration because the party opposing arbitration was challenging the "existence" rather than the "validity" of the underlying contract.
In Sanford v. MemberWorks, Inc., 483 F.3d 956 (9th Cir. 2007), Sanford bought a set of fitness tapes over the telephone. During the phone call, the call center representative allegedly read a script offering Sanford a trial membership in a MemberWorks program and advising her that a membership kit would be sent by mail.
When Sanford did not cancel the trial membership, MemberWorks billed her $72 for a one-year membership. On the following year, MemberWorks again billed her for a one-year membership, which prompted a phone call by Sanford who denied ever receiving a membership kit or hearing about the MemberWorks program. MemberWorks refunded only the second charge.
Sanford subsequently brought a putative class action against MemberWorks, alleging a violation on of 39 U.S.C.A. § 3009 and several other causes of action. MemberWorks filed a motion to compel arbitration pursuant to an arbitration agreement contained in the membership kit. In opposing the motion, Sanford argued that there was no arbitration agreement because she never entered a contract with MemberWorks.
The district court granted the motion, reasoning that Sanford's challenge to the underlying contract raised an issue for the arbitrator because "she challenge[d] the validity of the contract and not specifically the arbitration agreement."
The arbitrator denied Sanford's petition for class-wide arbitration but otherwise ruled in her favor. Specifically, he awarded her a full refund, plus interest, and directed MemberWorks to pay all arbitration fees. Despite prevailing at arbitration, Sanford filed a motion to vacate the award. The district court denied the motion to vacate and thus confirmed the award.
The principal issue on appeal was whether Sanford's challenge to the existence of the underlying contract was properly referred to the arbitrator. In discussing this issue, the Court articulated the following rule: "Issues regarding the validity or enforcement of a putative contract mandating arbitration should be referred to an arbitrator, but challenges to the existence of a contract as a whole must be determined by the court prior to ordering arbitration." (Emphasis in the original.)
Applying this rule, the Court held that the district court erred in ordering arbitration because it was undisputed that Sanford was challenging the existence rather than the validity of the underlying contract. Accordingly, the Court vacated the district court orders and remanded the case for a judicial determination of whether Sanford and MemberWorks ever entered into the underlying contract.
In reaching its holding, the Court cited footnote 1 of the Supreme Court's decision in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). At footnote 1, the Supreme Court explained that "[t]he issue of [a] contract's validity is different from the issue of whether any agreement between the alleged obligor and obligee was ever concluded."
Two recent decisions examined the contours of this distinction. Compare Ornelas v. Sonic-Denver T, Inc., No. 06-cv-00253-PSF-MJW, 2007 WL 274738 (D. Colo. Jan. 29, 2007) (finding that language barrier did not bring case within footnote 1 of the Buckeye decision) with Foss v. Circuit City Stores, Inc., No. 06-CV-153-P-S, 2007 WL 436083 (D. Me. Feb. 5, 2007) (finding that "infancy doctrine" brought case within footnote 1 of the Buckeye decision).
This Ninth Circuit case is consistent with the preferred Buckeye interpretation that issues raised regarding the "formation" of a contract, including its actual existence, are for the court and all other defenses, including attacks on its validity or enforceability, are for the arbitrator.
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