Under the FAA, District Court May Determine Issues of Arbitrability Even if it is Outside the District Where Arbitration is to Occur

In denying a motion to dismiss for improper venue, a United States District Court in the Western District of Tennessee held that the Federal Arbitration Act (“FAA”) permits district courts to determine issues of arbitrability even if they are outside the district where arbitration is to occur.

In Gone to the Beach, LLC v. Choicepoint Services, Inc., No. 05-2715 M1/AN, 2006 WL 1645046 (W.D. Tenn. June 15, 2006), Gone to the Beach sold all its business assets to Choicepoint. The asset purchase agreement (“the Agreement”) provided for an earnout payment based on the business’ financial performance in the subsequent year.

The Agreement provided that “[a]ny controversy, claim, or question of interpretation in dispute . . . arising out of or relating to this Agreement” must be resolved through arbitration in Atlanta, Georgia. The Agreement also provided that any dispute over calculation of the earnout payment must be resolved by an audit firm in Birmingham, Alabama.

After receiving what it believed to be an insubstantial earnout payment, Gone to the Beach questioned whether Choicepoint complied with the Agreement by operating the business consistent with past practice. Viewing the dispute as a matter of contract interpretation, Gone to the Beach demanded arbitration in Atlanta. Choicepoint objected to arbitration, believing the dispute should be resolved by the audit firm in Birmingham.

Gone to the Beach filed suit in the Western District of Tennessee seeking a declaratory judgment as to the arbitrability of the issues. Choicepoint moved for dismissal on the ground that venue was improper because “where the parties have agreed to arbitrate in a particular forum, only a district court in that forum has jurisdiction to compel arbitration pursuant to [s]ection 4 [of the FAA].”

The Court observed that “[t]here is some disagreement among the courts of appeals as to whether a court outside the district where arbitration is to occur may determine preliminary matters regarding the arbitration.” The Seventh Circuit has held that section 4 precludes outside courts from either compelling arbitration or reviewing the arbitrability of claims. Conversely, the Ninth Circuit has held that section 4 does not require a motion to enjoin arbitration to be heard in the district where arbitration is supposed to occur.