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FL: Please give us a brief overview of the case.
The plaintiff, PowerAgent, was an "Internet bubble" start-up company whose business plan was to offer monetary or other "points" rewards to consumers who would register at its website, fill out a questionnaire and then agree to receive -- and actually read --advertisements and special offers from retailers who would have paid PowerAgent for access to those registered consumers. The basic concept was that advertisers, who prefer to target their advertising to interested consumers, would pay a premium to PowerAgent for directing their ads to registered consumers, and PowerAgent could share part of that income with the registered users.
Power Agent approached EDS to provide necessary software to run the needed "back end" accounting systems. EDS agreed to take some of its compensation as capital stock in PowerAgent. In addition to a software services agreement containing a broad arbitration clause, EDS also entered stock purchase agreements without arbitration provisions.
When PowerAgent later burned through its capital and went broke, it sued EDS in federal court hoping to obtain a jury verdict in excess of $1 billion, based on EDS's alleged breach of a later alleged oral promise to lead a subsequent round of private financing. Because the original complaint contained a very broad RICO claim, recited the history of the parties' relationship and specifically referred to the Services Agreement with the arbitration clause, the federal district court ruled that the dispute over EDS's later refusal to invest more capital in the company was arbitrable as a "claim arising in connection with or in relation to" the Services Agreement. The trial court later rejected PowerAgent's attempt to amend its complaint by eliminating the RICO claim and references to the Services Agreement. Following an American Arbitration Association decision in EDS's favor, the Ninth Circuit affirmed, holding that PowerAgent itself had affirmatively presented the issue of arbitrability to the AAA and was bound by the AAA's independent decision that the dispute over subsequent financing was related to the Services Agreement and arbitrable.
FL: What was the other side arguing and how did you approach their arguments?
The factual issues raised by PowerAgent's allegations of wrongdoing were very complicated, but the American Arbitration Association fully cleared EDS of all the factual and legal charges made against it after a six-week evidentiary hearing. With respect to the critical and hotly contested procedural issue of arbitrability, PowerAgent argued that the gravamen of its complaint was based on EDS's alleged oral promise to lead a funding round, claimed that "promise" did not contain an arbitration clause and that its discussions with EDS about further capitalization took place long after the Services Agreement had been entered, and were not reasonably related to it. Because PowerAgent was hoping to avoid a lengthy trial in the AAA, it made the risky move of urging the AAA panel that it had the independent power to itself decide arbitrability.
We took advantage of this position in the federal court of appeals after the AAA award in EDS' favor was finalized. We argued to the court of appeals, and the court agreed in its decision, that since PowerAgent had told the arbitrators that they had the right to independently determine arbitrability, and since the arbitrators had done as it requested, it could not then contest the unfavorable ruling.
The Ninth Circuit did not reach the question whether PowerAgent should have been allowed to amend its original federal court complaint to focus only on breaches of EDS' later, oral alleged promise to lead a private financing round. Instead, the court relied on the fact that, after PowerAgent had been forced to file an arbitration complaint, it had asked the arbitrators to independently determine and rule that the dispute over the later financing promise was not subject to the broad arbitration clause in the initial software services agreement. That position was binding on Power Agent the court held in its ruling
FL: Given the court's ruling, how would you advise potential clients to proceed when negotiating similar deals in the future?
This precedential decision adds extra protections for businesses that, for good many good reasons, prefer to have experienced business arbitrators, not juries, decide all disputes arising out of their contractual relationships. While there are some instances in which arbitration may not be preferred, it generally is. As occurred in this case, broad arbitration provisions in the initial contract with another company (or employee or other person) may be held applicable to disputes that arise out of a continued course of dealing with that company, even if other or subsequent agreements do not themselves contain arbitration clauses. A business desiring to invoke arbitration in all disputes should insist in arbitration clauses in all agreements it enters, even if in deals which seem clearly to be directly related to another contract that has an arbitration clause.
FL: Given the court's ruling, what would you advise potential clients, who currently have similar arbitration clauses and deals as the parties in this case, to do in the future?
Federal trial court orders dismissing or staying an action in favor of arbitration are, typically, not appealable to a federal court of appeals. Instead, the plaintiff who has been forced to file for arbitration must proceed through the arbitration procedure to conclusion before it can challenge the initial arbitrability ruling before a federal appeals court.
The clear dictate of the federal court of appeals in this case is that a party who is opposed to arbitrating its claim, but has been forced to do so, will lose its right to later appeal the initial arbitrability ruling if it urges the arbitration panel that it has the power to determine arbitrability. A party opposed to arbitration should make clear at every point its objection to the process, so that no argument can be made that it consented to the arbitration panel's right to decide the dispute.
Mark Jansen is a partner in Townsend and Townsend and Crew LLP's San Francisco office. He is a trial attorney whose practice includes antitrust, unfair business practice, business tort, intellectual property and other business dispute litigation. His practice is focused on antitrust, unfair practices and theft of trade secret law. He also has substantial experience in trademark, copyright, breach of contract, and class action litigation. He recently prevailed in the case of POWERAGENT INC. v. ELECTRONIC DATA 358 F.3d 1187 (9th Cir. 2004) for his client, Electronic Data Systems, and discussed the case with FindLaw.