Arising Under, or Arising Out Of?

Court of Appeals ruling says phrase ‘arising under’ creates a broad arbitration clause

A two-word phrase affecting the arbitrability of contract disputes has caused a circuit divide between federal appeals courts. In a decision issued Sept. 20, the Colorado Court of Appeals placed itself with the 1st, 3rd, 5th, 6th, 7th, 8th and 11th Circuit Courts of Appeals when it ruled the phrase “arising under” creates a broad arbitration clause when determining whether disputes “arising under” a contract must be arbitrated.

Plaintiff Digital Landscape argued the court should construe “arising under” narrowly, claiming the arbitrator did not have jurisdiction to decide a claim Digital believes did not “arise under” the contract at issue.

The issue on appeal for Digital Landscape v. Media Kings concerns a dispute over arbitrability that emerged after Digital sued Media for breach of contract to recover unpaid earnings, which Digital claimed Media owed the company for work Digital had done for a third-party client not named as a party in the case.

Media’s counterclaims on appeal allege Digital Landscape breached an implied covenant of good faith and fair dealing by disclosing confidential information to one of Media’s clients by soliciting that client’s business, disparaging Media to the client, and by poaching the client away from Media.

An arbitrator awarded $68,197.41 to Digital Landscape for unpaid work by Media Kings. She also found breach of good faith and fair dealing by Digital, and awarded $24,400 in damages to Media. Digital petitioned in district court to, in part, vacate the arbitrator’s award of damages to Media. Digital claimed Media’s duty of loyalty claim did not “arise under” the contract’s arbitration clause, and moreover the arbitrator did not have jurisdiction to decide that claim. The district court disagreed and confirmed the entire arbitration order.

The Court of Appeals decision leaned heavily on Colorado case law and federal policy construed to favor arbitration when there is ambiguity about a dispute’s arbitrability. Under the Federal Arbitration Act, resolutions to doubts about the scope of arbitrable issues should lean in favor of arbitration, including when the dispute is about the contract’s language construction.

In its ruling, the Court of Appeals discussed how federal circuit courts have split over how to interpret “arising under.” Mediterranean Enterprises, Inc. v. Ssangyong Corp., a 1983 decision from the 9th Circuit, is one key precedent. When the terms refer to which disputes parties must arbitrate rather than take to court, the court held, disputes “arising under” a contract create a narrower arbitration clause than disputes “arising out of or relating to” a contract. The Federal, 2nd and 9th Circuits have since followed the precedent set by Mediterranean Enterprises.

To read this story and other complete articles featured in the October 1, 2018 print edition of Law Week Colorado, copies are available for purchase online.