Hamblen v. Hon. Hatch / Winslow Memorial Hospital, Inc. (Arizona Supreme Court Case No. CV-16-0260-PR, filed July 21, 2017)

This is a case that only arbitration junkies can fully appreciate. It arises out of an employment dispute in which an employer and employee submitted their respective claims against each other to mandatory arbitration under the broad arbitration provision in their employment contract. Neither side specifically challenged the validity or enforceability of that arbitration provision. The arbitrator ruled in favor of the employer and held the employer properly rescinded the employment contract. After the superior court confirmed the arbitrator’s award, the employer sought to litigate in state court claims against the employee it could have litigated in the arbitration. The Arizona Supreme Court put the kibosh on those efforts. Applying what is know as the “separability doctrine,” the court held that even though the employment contract had been rescinded, the employer could not subsequently litigate in state court claims against the employee that were permissive counterclaims in the arbitration. The reason: the employer had not specifically challenged the validity and enforceability of the contract’s arbitration provision, and that provision stated: “All counterclaims that would be compulsory or permissive under Federal Rule of Civil Procedure 13(a) and (b) if the claim were filed in court shall be asserted in the arbitration and not otherwise.”

Because the separability doctrine presumes that the arbitration clause is separable from the overall contract, where, as here, the parties agree to a broad arbitration clause that is not specifically challenged, that provision will apply even if the arbitrator finds that the overall contract is void or voidable. And this is so unless (1) the parties have provided otherwise in their contract; (2) the parties stipulate to a bifurcated procedure in which they may later litigate claims in court if the arbitrator finds the entire contract void or voidable; or (3) the party opposing arbitration establishes that the clause itself is unenforceable. Thus, the separability doctrine operates as a presumption that the parties intend an arbitration clause to be severable from the rest of the agreement, but—consistent with the notion that the scope of contractual arbitration turns on the parties’ agreement—the parties can themselves provide otherwise.

Hamblen v. Hon. Hatch / Winslow Memorial Hospital, Inc. at ¶ 33.

To understand the court’s decision, let’s start by answering the first question you’re probably asking yourself: What is the separability doctrine?

The origin of the separability doctrine lies in the United States Supreme Court’s opinion in Pima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). In that case, the Supreme Court faced the issue of whether the federal court or an arbitrator should resolve a claim of fraud in the inducement of a contract providing for arbitration. Applying the Federal Arbitration Act (FAA), the Court held “if the claim is fraud in the inducement of the arbitration clause itself–an issue which goes to the ‘making’ of the agreement to arbitrate–the federal court may proceed to adjudicate it. But the statutory language [of the FAA] does not permit the federal court to consider claims of fraud in the inducement of the contract generally.” Id. at 403-04.

The Supreme Court subsequently expanded on its Pima Paint ruling in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010). In that case, one of the parties to a contract containing an arbitration clause opposed arbitration and sought instead to litigate in federal court her state law unconscionability claim. The Supreme Court held a party may prevent arbitration of claims within the scope of an arbitration agreement only if he or she “challenges specifically the validity of the agreement to arbitrate,” rather than challenging the enforceability or validity of the contract as a whole. Id. at 70.

The Arizona Court of Appeals adopted the separability doctrine in U.S. Insulation, Inc. v. Hilro Construction Co., Inc., 146 Ariz. 250 (App. 1985). Interpreting Arizona’s Uniform Arbitration Act, A.R.S. §§ 12-1501 to -1518, the court of appeals held an “arbitration clause is considered to be an agreement independent and separate from the principal contract.” Hilro, 146 Ariz. at 253. So when, for example, fraud in the inducement is asserted by a party to a contract containing an arbitration provision, “where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud.” Id.

In Hamblen, the Arizona Supreme Court confirmed that Arizona law codifies the separability doctrine and thus applies to all contracts governed by Arizona’s Revised Uniform Arbitration Act (RUAA), A.R.S. §§ 12-3001 to -3029, and the state’s Uniform Arbitration Act. And although, by their terms, neither the RUAA nor the Uniform Arbitration Act applies to an agreement to arbitrate controversies between employers and employees, the supreme court noted the parties in Hamblen voluntarily “opted in” to the RUAA and the Uniform Arbitration Act.

Turning to the specific facts of Hamblen, the supreme court noted that had the employer “separately and specifically” challenged (even on identical grounds) both the arbitration agreement and the underlying employment contract, “the superior court conceivably could have found the arbitration clause to be unenforceable, denied [the employee’s] motion to compel arbitration [filed before the arbitration], retained jurisdiction, and ruled on the merits of all claims.” But that is not what happened in Hamblen. Instead, the employer only challenged the validity of the employment agreement as a whole. Under the separability doctrine, whether grounds existed to rescind the employment agreement as a whole was for the arbitrator to decide. And once the superior court correctly referred the parties’ dispute to arbitration, the employer was required under the terms of the arbitration clause to present in the arbitration all counterclaims, permissive or otherwise, that arose out of or related to the employment agreement. The employer’s decision not to pursue certain claims in the arbitration did not justify its decision to later attempt to assert them in superior court after the arbitrator ruled the employer properly rescinded the employment contract. The arbitrator’s ruling on rescission “did not vitiate the unchallenged arbitration clause in the parties’ contract or preclude the arbitrator from also deciding all of the parties’ employment related claims.” Once the superior court confirmed the arbitration award, which stated it was “in full settlement of all claims and counterclaims submitted” to arbitration and denied “all claims not expressly granted” in the award, the separability doctrine incorporated into the RUAA and Uniform Arbitration Act precluded any further litigation of arbitrable claims that could or should have been pursued in the arbitration.

To read the supreme court’s opinion in Hamblen, click here.