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State ex rel. Pinkerton v. Fahnestock

Supreme Court of Missouri, En Banc

October 31, 2017




         Steven Pinkerton seeks a writ of mandamus or, in the alternative, a writ of prohibition requiring the circuit court to overrule the motion to compel arbitration filed by Aviation Institute of Maintenance (the school). In the alternative, Mr. Pinkerton seeks a writ of mandamus requiring the circuit court to enforce discovery and allow him to file additional opposition to the school's motion to compel arbitration. Mr. Pinkerton contends the circuit court improperly sustained the school's motion to compel arbitration because: (1) the school's incorporation of the delegation provision into the arbitration agreement by reference to the American Arbitration Association's commercial rules was not clear and unmistakable evidence the parties intended to arbitrate threshold questions of arbitrability; (2) issues regarding the formation of the arbitration agreement cannot be delegated to an arbitrator; and (3) he specifically challenged the validity and enforceability of the delegation provision.

         This Court issued a preliminary writ and now holds the incorporation of the American Arbitration Association (AAA) rules into the arbitration agreement provided clear and unmistakable evidence the parties intended to delegate threshold issues of arbitrability to the arbitrator. Mr. Pinkerton's only specific challenge to the delegation provision - that it would be unconscionable to delegate a determination of unconscionability to a person with a direct financial interest in the outcome - was without merit, and he did not otherwise specifically challenge the validity or enforceability of the delegation provision. Accordingly, the circuit court properly sustained the school's motion to compel arbitration, stayed the case, and ordered the parties to arbitrate threshold issues of arbitrability. The preliminary writ is quashed.

         Factual and Procedural Background

         In 2009, Mr. Pinkerton e-mailed the school and requested information about becoming an aircraft technician.[1] In response, Adrian Rothrock, an admissions representative, scheduled an appointment at the school's Kansas City campus. Soon thereafter, Mr. Pinkerton met with Mr. Rothrock and received a tour of the school and a packet of information. A few weeks later, Mr. Pinkerton visited the school for a second time and submitted an application for admission. Four days later, he returned to the school to sign the two-page enrollment agreement for the aviation maintenance technical engineer program.

         The enrollment agreement listed information about the program's duration, graduation requirements, tuition and fees, scheduling, and its policies regarding cancellation, termination, withdrawal, and refunds. The enrollment agreement also included an arbitration agreement. The arbitration agreement was about three-fourths from the top of the enrollment agreement's first page. The heading "Arbitration Agreement" was in bold face type, and the terms of the arbitration agreement were in the same type size as the remainder of the enrollment agreement. The arbitration agreement provided:

I agree that any controversy, claim or dispute of any sort arising out of or relating to matters including, but not limited to: student admission, enrollment, financial obligations and status as a student, which cannot be first resolved by way of applicable internal dispute resolution practices and procedures, shall be submitted for arbitration, to be administered by the American Arbitration Association located within Virginia Beach, Virginia, in accordance with its commercial arbitration rules. All fees and expenses of arbitration shall be shared equally and any award rendered in favor of a student will be limited to the total amount paid to the School by the student. Any award or determination rendered by the arbitrator(s) shall be final and entered as a judgment by a court of competent jurisdiction.

Mr. Pinkerton did not receive a copy of the AAA commercial rules.[2]

         Rule R-7 of the commercial rules defined the scope of the arbitrator's "jurisdiction." It read, in relevant part:

The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

Mr. Pinkerton signed the enrollment agreement and received a copy. An admissions representative and another school official also signed the agreement.

         On September 28, 2009, Mr. Pinkerton began attending classes. Almost six months later, he requested to switch from the school's 100-week aviation maintenance technical engineer program to a shorter 80-week aviation technician program. The enrollment agreement he signed for the aviation technician program was dated March 24, 2010, and contained a change in the credit hours required for graduation, the cost of books per semester, the total length of the program, and the estimated total student cost per quarter. Otherwise, the enrollment agreement for the aviation technician program included the same information as the enrollment agreement for the aviation maintenance technical engineer program as well as the same arbitration agreement.[3]

         In 2011, Mr. Pinkerton graduated from the school as the valedictorian of the night program. Having fulfilled the graduation requirements, he received a certificate of aviation maintenance, which entitled him to take the federal aviation administration examinations to become an airline mechanic. He took both required examinations and received his temporary airman certificate from the federal aviation administration in 2012. Despite having obtained his certification, Mr. Pinkerton alleges he cannot find employment in the aviation field.

         In 2014, Mr. Pinkerton filed a lawsuit against the school, Mr. Rothrock, and the school's owner, W. Gerald Yagen, alleging the school engaged in fraud, misrepresentation, and deception related to the school's graduation and job placement rates, starting salaries, and the costs and benefits of its educational programs. The lawsuit included claims for violations of the Missouri Merchandising Practices Act, fraudulent misrepresentation, negligent misrepresentation, money had and received, and unjust enrichment.

         The school moved to dismiss, or in the alternative, to compel arbitration and stay the proceedings, citing the arbitration agreement in the enrollment agreement requiring Mr. Pinkerton to arbitrate "any controversy, claim or dispute." The school further contended the arbitration agreement delegated threshold arbitrability disputes, such as whether an arbitration clause is enforceable or its applicability to the dispute at issue, to the arbitrator by incorporating by reference the AAA's jurisdictional rule into the arbitration agreement. The school requested the circuit court enforce this delegation provision if Mr. Pinkerton challenged the arbitration agreement. The school also filed a motion to stay discovery and all other pending pretrial proceedings.

         In response, Mr. Pinkerton filed his preliminary opposition to the school's motion to compel arbitration and the school's motion to stay discovery. Mr. Pinkerton argued the threshold issue of the existence of an enforceable arbitration agreement cannot be delegated to an arbitrator but, instead, is always a decision for the court. He also filed a motion to stay briefing and ruling on the motion to compel arbitration until the parties could conduct discovery related to the arbitration agreement. The circuit court sustained Mr. Pinkerton's motion to stay briefing and ruling on the motion to compel arbitration and allowed the parties 90 days to conduct discovery limited to "the issue of whether an arbitration contract was formed and the scope of any arbitration contract."

         The school subsequently renewed its motion to compel arbitration, contending Mr. Pinkerton had not specifically challenged the delegation provision but challenged only the arbitration agreement as a whole. In response, Mr. Pinkerton argued he had challenged the existence of the delegation provision by challenging the existence of any arbitration agreement - including any agreement to delegate issues of arbitrability - in his preliminary opposition. Mr. Pinkerton also contended, for the first time, that the delegation provision was not clearly and unmistakably incorporated into the arbitration agreement, that both the arbitration agreement and the delegation provision lacked consideration, and that the delegation provision was unconscionable.

         After conducting a hearing on the matter, the circuit court sustained the school's motion to compel arbitration.[4] The circuit court concluded the delegation provision was enforceable because Mr. Pinkerton did not challenge the delegation provision specifically. The circuit court further held the provision provided for delegation of the gateway question of whether the parties agreed to arbitrate and, therefore, the issue of whether the arbitration agreement was unconscionable is left to the arbitrator per the clear and unmistakable intent of the parties expressed by the incorporation of the AAA rules into the agreement.

         Mr. Pinkerton petitions this Court for a writ of mandamus or prohibition, requesting the Court order the circuit court to overrule the school's motion to compel arbitration or, in the alternative, order the circuit court to enforce discovery and allow Mr. Pinkerton to file additional opposition to the school's motion to compel arbitration. This Court issued a preliminary writ of prohibition. Mo. Const. art. V, sec. 4.

         Standard of Review

         This Court has the authority to "issue and determine original remedial writs." Id. Writs of prohibition or mandamus are appropriate mechanisms to challenge whether a motion to compel arbitration was improperly sustained. State ex rel. Hewitt v. Kerr, 461 S.W.3d 798, 805 (Mo. banc 2015); see also State ex rel. Union Pac. R.R. Co. v. David, 331 S.W.3d 666, 666 (Mo. banc 2011). This Court reviews de novo the legal issue of "[w]hether a valid, enforceable arbitration agreement exists." Union Pac., 331 S.W.3d at 667.


         Mr. Pinkerton contends the circuit court erred in sustaining the school's motion to compel arbitration. He asserts the school's incorporation of the AAA commercial rules into the arbitration agreement did not "clearly and unmistakably" express the parties' intent to delegate threshold issues of arbitrability to an arbitrator. He further contends the circuit court improperly ordered arbitration because only a court, not an arbitrator, can decide whether an arbitration agreement was formed. Lastly, Mr. Pinkerton argues the circuit court erred in finding he did not specifically challenge the delegation provision's validity and enforceability.

         The Delegation Provision

         The circuit court determined the arbitration agreement contained an enforceable delegation provision delegating issues of arbitrability to the arbitrator. Mr. Pinkerton contends his signature on the enrollment agreement was not evidence he agreed to delegate threshold issues of arbitrability to the arbitrator because the delegation provision was not included as part of the arbitration agreement but was instead incorporated by reference to the AAA commercial rules. Mr. Pinkerton argues that incorporating a delegation provision by reference does not meet the "clear and unmistakable" standard required to show the parties intended an arbitrator to decide issues of arbitrability.

         Generally, any silence or ambiguity "concerning the scope of arbitrable issues should be resolved in favor of arbitration." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) (internal quotation omitted). Issues will, therefore, typically "be deemed arbitrable unless it is clear that the arbitration clause has not included them." First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (internal quotations omitted). This has been referred to as the "presumption of arbitrability." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 300 (2010).

         This presumption of arbitrability, however, is reversed when considering whether a court or an arbitrator should decide threshold questions of arbitrability. First Options, 514 U.S. at 944-45. Disputes about arbitrability include those "questions such as whether the parties are bound by a given arbitration clause, or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." BG Grp. PLC v. Republic of Arg., 134 S.Ct. 1198, 1206 (2014) (internal quotations omitted). Disputes over the formation of the parties' arbitration agreement and its enforceability or applicability to the dispute at issue have been considered threshold issues of arbitrability. Id. at 1206-07. When considering whether parties have intended to delegate threshold questions of arbitrability to an arbitrator, "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clea[r] and unmistakabl[e] evidence that they did so." Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 69 n.1 (2010) (internal quotation omitted) (alteration in original). This "'clear and unmistakable' requirement . . . pertains to the parties' manifestation of intent" that issues of arbitrability be decided by the arbitrator instead of the court. Id. at 69 n.1 (emphasis omitted).

         The United States Supreme Court has addressed why different standards are necessary when considering "whether a particular merits-related dispute is arbitrable" versus "who (primarily) should decide arbitrability." First Options, 514 U.S. at 944-45 (emphasis omitted). The Supreme Court explained:

[T]his difference in treatment [between whether a particular merits-related dispute is arbitrable or who (primarily) should decide arbitrability] is understandable. The latter question arises when the parties have a contract that provides for arbitration of some issues. In such circumstances, the parties likely gave at least some thought to the scope of arbitration. And given the law's permissive policies in respect to arbitration, one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. On the other hand, the former question - the who (primarily) should decide arbitrability question - is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers. And, given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the "who should decide arbitrability" point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.

Id. at 945 (internal quotations and citations omitted) (emphasis omitted).

         Mr. Pinkerton interprets the "clear and unmistakable" standard to prohibit the delegation provision from being incorporated by reference into an arbitration agreement. He contends that no clear and unmistakable evidence exists of the parties' mutual assent to the delegation provision unless the delegation provision is expressly written into an arbitration agreement. Mr. Pinkerton incorrectly assumes that a contract is silent or ambiguous about who should decide arbitrability if the delegation provision is incorporated into an arbitration agreement by reference.

         While the Supreme Court has referred to the "clear and unmistakable" standard as a "heightened standard, " First Options explains it is "heightened" insofar as it is a higher standard than the "presumption of arbitrability" standard applied when interpreting "silence" or "ambiguity" related to the scope of arbitration provisions. Rent-A-Ctr., 561 U.S. at 69 n.1. The Supreme Court has not held the "clear and unmistakable" standard is heightened in relation to generally applicable principles of contract interpretation.

         Interpretation of a written contract is a question of law. Webbe v. Keel, 369 S.W.3d 755, 756 (Mo. App. 2012). In Missouri, "the primary rule of contract interpretation is that courts seek to determine the parties' intent and give effect to it." Chochorowski v. Home Depot U.S.A., 404 S.W.3d 220, 226 (Mo. banc 2013). "The intention of the parties is to be gleaned from the four corners of the contract." L.A.C. ex rel. D.C. v. Ward Parkway Shopping Ctr. Co., 75 S.W.3d 247, 260 (Mo. banc 2002). Each clause "must be read in the context of the entire contract, and interpretations that render provisions meaningless should be avoided." McGuire v. Lindsay, 496 S.W.3d 599, 607 (Mo. App. 2016). This Court determines the parties' intent as "expressed by the plain and ordinary meaning of the language of the contract." Chochorowski, 404 S.W.3d at 226. "When the language of a contract is clear and unambiguous, the intent of the parties will be gathered from the contract alone, and a court will not resort to a construction where the intent of the parties is expressed in clear and unambiguous language." Id. at 226-27. "It is only where the contract is ambiguous and not clear that resort to extrinsic evidence is proper to resolve the ambiguity." J. E. Hathman, Inc. v. Sigma Alpha Epsilon Club, 491 S.W.2d 261, 264 (Mo. banc 1973).

         Missouri further recognizes that "matters incorporated into a contract by reference are as much a part of the contract as if they had been set out in the contract in haec verba." Dunn Indus. Grp., Inc. v. City of Sugar Creek, 112 S.W.3d 421, 435 n.5 (Mo. banc 2003). Generally, "[t]erms not explicit in a contract may be incorporated into the contract by reference" so long as the "intent to incorporate [is] clear." Hewitt, 461 S.W.3d at 810-11. "To incorporate terms from another document, the contract must make [] clear reference to the document and describe[] it in such terms that its identity may be ascertained beyond a doubt." Id. Parties may, therefore, "incorporate contractual terms by reference to a separate, noncontemporaneous document, including a separate agreement to which they are not parties, including a separate document which is unsigned." Intertel, Inc. v. Sedwick Claims Mgmt. Servs., Inc., 204 S.W.3d 183, 196 (Mo. App. 2006). There is no requirement that an incorporated document be attached to the contract or provided to the parties prior to the execution of the contract.

         Here, the parties' arbitration agreement specifically references the AAA's commercial arbitration rules. At the time Mr. Pinkerton signed the enrollment agreement, the AAA's "Commercial Arbitration Rules with Supplementary Procedures for Consumer-Related Disputes" governed all consumer arbitration disputes. The reference to the AAA's commercial rules in the arbitration agreement was not a mere passing reference to these rules; instead, it was a clear reference to an identifiable, ascertainable set of rules. Such a reference establishes the parties' intent to incorporate the AAA commercial arbitration rules into the enrollment agreement.

         This finding is consistent with most federal circuit courts, which have concluded arbitration agreements containing similar language were sufficient to incorporate by reference the delegation provision in the AAA rules. For example, arbitration agreements stating disputes will be "settled by, " "conducted by, " and "determined by" arbitration "in accordance with" specific rules containing a delegation provision have been held to have "clearly and unmistakably" incorporated the delegation provision into the arbitration agreement. Brennan v. Opus Bank, 796 F.3d 1125, 1129 (9th Cir. 2015) ("settled by"); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012) ("conducted by"); Fallo v. High - Tech Inst., 559 F.3d 874, 877-78 (8th Cir. 2009) ("settled by"); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006) ("settled by"); Terminix Int'l Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th Cir. 2005) ("conducted"); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005) ("determined by").[5]

         The dissenting opinion attempts to differentiate these federal cases on the basis that all but one involved sophisticated parties, not a mere consumer such as Mr. Pinkerton.[6] But in doing so, the dissenting opinion ignores longstanding Missouri contract principles and, instead, advocates for adoption of a standard that would have far-reaching consequences beyond interpretation of arbitration agreements.

         The dissenting opinion asserts whether Mr. Pinkerton intended to incorporate the AAA rules is a factual question that should be put to the parties' proof. But for purposes of contract interpretation, the intent of the parties is a question of law to be determined from the four corners of the contract. Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 846 (Mo. banc 2012). It is only when an ambiguity arises and cannot be resolved within the four corners of the contract that "the parties' intent can be determined by use of parol evidence." Id. Only then does the parties' intent become "a factual issue to be resolved by the finder of fact." Id.

         The dissenting opinion recognizes these principles but contends this Court must look at the "context" of an agreement - including who signed it and the nature of the agreement - to determine ambiguity. More specifically, the dissenting opinion asserts that the unsophisticated nature of a party is key to the determination of ambiguity and that "when a consumer contract purports to incorporate by reference another writing, the court should determine whether the parties actually know and understand the provisions to be included."

         But the dissenting opinion is mischaracterizing the general proposition that "ambiguity depends on context" to conclude "context" means consideration of the parties' circumstances and whether they actually know and understand the incorporated provision. Such a subjective standard is not what this Court means by considering the "context" of an agreement. Rather, "context" means the reading of the agreement as a whole to determine whether an ambiguity exists. J. E. Hathman, 491 S.W.2d at 264; see also Purcell Tire & Rubber Co., v. Exec. Beechcraft, Inc., 59 S.W.3d 505, 510 (Mo. banc 2001) ("Contract language is not interpreted in a vacuum, but by reference to the contract as a whole.").

         Furthermore, while the dissenting opinion cites to cases that mention the sophistication of the parties, such cases do not support the subjective "context" standard advocated for by the dissenting opinion. Instead, such cases address specific contract provisions or clauses - such as exculpatory clauses, indemnity clauses, forum selection clauses, and jury trial waivers - that impose additional requirements for a specific provision or clause to be enforceable.

         For instance, in addressing exculpatory and indemnity clauses, this Court held limitations or shifts of liability in contracts are enforceable if the exculpatory or indemnity clause contains clear, unambiguous, unmistakable, and conspicuous language. Alack v. Vic Tanny Intern. of Mo., Inc., 923 S.W.3d 330, 337-38 (Mo. banc 1996). In determining the clause's enforceability, this Court did not consider parol evidence as to the parties' subjective intent regarding the clause. Instead, the Court required the clause to include specific terms like "'negligence' or 'fault' or their equivalents" that would conspicuously shift the liability. Id. at 337. This Court subsequently held that requirement does not govern contracts when the parties are both sophisticated businesses. Purcell Tire, 59 S.W.3d at 509. But again, the parties' subjective intent was not examined. This Court simply recognized: "Sophisticated businesses that negotiate at arm's length may limit liability without specifically mentioning 'negligence, ' 'fault, ' or an equivalent." Id. "Sophisticated parties have freedom of contract - even to make a bad bargain, or to relinquish fundamental rights." Id. at 508.

         Similarly, in High Life Sales Co. v. Brown-Forman Corp., 823 S.W.2d 493, 497 (Mo. banc 1992), this Court adopted the majority rule that forum selection clauses will be enforced, so long as doing so is neither unfair or unreasonable. In considering whether to enforce the forum selection clause, this Court considered whether "the contract was entered into under circumstances that caused it to be adhesive" - that is, a contract "in which the parties have unequal standing in terms of bargaining power." Id. There was no consideration of whether the parties subjectively understood the forum selection clause. Id. Instead, this Court reasoned "the important factor is that the contract terms were generally arrived at under circumstances that cannot be described as 'adhesive.'" Id.

         Finally, in Malan Realty Investors, Inc. v. Harris, 953 S.W.2d 624, 627 (Mo. banc 1997), this Court held that the parties' waiver of a right to a jury trial must be knowing and voluntary. But in doing so, this Court recognized that "more than contract law is involved." Id. And while the Court acknowledged "[t]he real concern with every case decision has been the relative bargaining powers of the parties, " the analysis focused primarily on whether the written agreement contained "clear, unambiguous, unmistakable, and conspicuous language" such that a knowing and voluntary waiver of the right to a jury trial was evident. Id.

         It follows that none of the cases considering the sophistication of the parties addresses arbitration agreements, and each case presents an exception to general principles of contract law. The United States Supreme Court has held arbitration can be limited only by application of principles of general contract law, AT&T Mobility LLC v. Concepcion, 563 U.S. 333, ...

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