The First Circuit Court of Appeals recently clarified the standard District Courts in the circuit should be using to rule on motions to compel arbitration under the Federal Arbitration Act (“FAA”). In Air-Con, Inc. v. Daikin Applied Latin America, LLC, the First Circuit held that the District Courts should apply the summary judgment standard to evaluate motions to compel arbitration under the FAA.
In the case, Air-Con, Inc. (“Air-Con”) filed a complaint against Daikin Applied Latin America, LLC (“Daikin Applied”), alleging that Daikin Applied had violated Puerto Rico’s Dealer Protection statute by unfairly charging Air-Con higher prices as compared to other customers, suddenly raising prices, and failing to regularly and timely deliver products to Air-Con. Daikin Applied sought to compel arbitration, arguing that an agreement between Air-Con and Daikin Applied’s parent company, Daikin Industries, bound Air-Con to resolve its claims in arbitration. Air-Con opposed the motion to compel, arguing that Daikin Applied was not a party to the agreement, and therefore could not compel arbitration, and that an unwritten agreement governed the conduct between Air-Con and Daikin Applied. Moreover, Air-Con argued, its agreement with Daikin Industries was only assignable to third-parties with the written consent of Air-Con and Daikin Industries, which did not exist in this case. The District Court of Puerto Rico agreed with Daikin Applied and granted its motion to compel. Air-Con appealed.
On appeal, the First Circuit took the opportunity to “join [its] sister circuits in concluding that district courts should apply the summary judgment standard to evaluate motions to compel arbitration under the FAA.” The First Circuit reached its conclusion after reviewing the FAA’s language and purpose and determining “[t]he summary judgment standard, which evaluates the evidentiary supportability of claims, is more appropriate than Rule 12’s plausibility standard, which is limited to a facial analysis of the pleadings.” In essence, this means parties may not just claim in their complaint that a contract compels the parties to arbitration – they must have evidence supporting their claim that the parties have agreed to arbitrating the claims in dispute.
The First Circuit’s clarification was ultimately not necessary for its reversal of the District Court. The First Circuit reversed the District Court’s granting of the motion to compel, finding that the District Court impermissibly placed the burden on Air-Con, the non-moving party, to disprove the existence of an agreement to arbitrate, when the burden should have been on Daikin Applied, the moving party, to establish that an agreement existed. Additionally, the First Circuit reversed the District Court on the further grounds that the District Court had interpreted the allegations in favor of Daikin Applied, whereas the District Court should have interpreted the allegations in favor of Air-Con, the non-moving party. When analyzing the agreement Daikin Applied was relying on to compel arbitration, the First Circuit held that the agreement was between Air-Con and Daikin Industries, not with Daikin Applied and no assignment had been effectuated. Therefore, it held, there was no arbitration agreement between Daikin Applied and Air-Con. The First Circuit reversed and remanded the case for further proceedings.