Brake Masters Systems, Inc. v. Gabbay

Decision Date12 November 2003
Docket NumberNo. 2 CA-CV 2003-0067.,2 CA-CV 2003-0067.
PartiesBRAKE MASTERS SYSTEMS, INC., an Arizona corporation, Plaintiff/Appellee, v. Ken K. GABBAY, a married man, Defendant/Appellant.
CourtArizona Court of Appeals

Robert A. Fortuno, P.C., By Robert A. Fortuno, Tucson, for Plaintiff/Appellee.

Rusing & Lopez, P.L.L.C., By Cynthia Kuhn and Lorraine C. Gin, Tucson, for Defendant/Appellant.

OPINION

HOWARD, J.

¶ 1 Appellant Ken Gabbay appeals from the trial court's judgment confirming the arbitration award entered in favor of appellee Brake Masters Systems, Inc. Gabbay argues that the trial court erred because the parties had not agreed either to allow the arbitrator to decide the arbitrability of issues or to submit the particular issues involved to arbitration. Because substantial evidence supports the trial court's findings on the arbitrator's authority to decide the arbitrability of the issues and because the arbitrator's decision is entitled to deference, we affirm.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 The underlying facts are undisputed. Gabbay entered into a contract for a Brake Masters franchise in the Los Angeles, California, area. After a dispute arose about the proposed franchise location, Gabbay and Brake Masters entered into a settlement agreement terminating their franchise relationship and Gabbay's right to use Brake Masters' name, slogan, trademarks, etc. The settlement agreement also provided as follows for arbitration of disputes arising from the agreement:

Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in Tucson, Arizona, before Lawrence H. Fleischman, Esq., in accordance with the standard rules of arbitration utilized by him. If Mr. Fleischman is unable or unwilling to serve as arbitrator, the parties will attempt to mutually agree upon a replacement. If they cannot agree within 10 days, then the arbitration will be conducted in Tucson, Arizona pursuant to, and by a single arbitrator selected in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the decision of the arbitrator may be entered in any court of competent jurisdiction.

¶ 3 After the settlement, Gabbay began operating a brake repair and service business using a name, color scheme, and slogan that Brake Masters believed were deceptively similar to its own name, color scheme, and slogan. Brake Masters demanded that Gabbay discontinue their use, a demand Gabbay refused. Brake Masters then requested arbitration under the settlement agreement. Gabbay objected to arbitration on the ground that Brake Masters' issues were not fairly included within those contemplated by the arbitration clause. Brake Masters disagreed, and the arbitration was conducted with Fleischman as the arbitrator. Gabbay refused to attend. During the arbitration proceeding, Fleischman determined that he had the authority to decide the arbitrability of the issues. He then found that the issues were subject to arbitration and ruled in favor of Brake Masters on the merits. Brake Masters asked the superior court to confirm the arbitration award, which it did over Gabbay's objection. This appeal followed.

PRE-ARBITRATION JUDICIAL DETERMINATION

¶ 4 Gabbay first contends that the trial court erred in confirming the award, arguing A.R.S. § 12-1502 requires that, if one party contests arbitrability, the party seeking arbitration must obtain a judicial decision concerning arbitrability before the arbitration may proceed. We review this issue of statutory construction de novo. See Republic Nat'l Bank of N.Y. v. Pima County, 200 Ariz. 199, ¶ 10, 25 P.3d 1, ¶ 10 (App. 2001).

¶ 5 An arbitrator may only resolve issues the parties have agreed to submit to arbitration. Foy v. Thorp, 186 Ariz. 151, 153, 920 P.2d 31, 33 (App.1996); see A.R.S § 12-1501. A party seeking to arbitrate may ask a court to determine whether the parties agreed to submit an issue to arbitration, i.e., the arbitrability of the issue, before the arbitration proceeds.

On application of a party showing an agreement described in § 12-1501, and the opposing party's refusal to arbitrate, the court shall order the parties to proceed with arbitration, but if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall order arbitration if found for the moving party. Otherwise, the application shall be denied.

§ 12-1502(A).

¶ 6 Although § 12-1502(A) allows a party attempting to arbitrate to seek a court order determining arbitrability and compelling the other party to arbitrate, this section does not require the party attempting to arbitrate to do so. And § 12-1502(B) allows a party opposing arbitration to seek a court order staying the arbitration, giving the opposing party the same option of a pre-arbitration judicial determination of arbitrability. Furthermore, A.R.S. § 12-1512(A) allows a party opposing arbitration to object to confirmation of the award on the ground that "the arbitrators exceeded their powers" or that "there was no arbitration agreement." This section would not preserve these grounds for decision in the post-arbitration confirmation process if the other sections required a pre-arbitration judicial determination of arbitrability.

¶ 7 Most other courts that have considered this issue have held that a party is not required to seek a pre-arbitration determination of arbitrability even when the other party objects to the arbitrability of the issue. See, e.g., Nat'l Ass'n of Broad. Employees & Technicians v. Am. Broad. Co., 140 F.3d 459, 462 (2d Cir.1998)

(NABET) (judicial determination of arbitrability need not precede arbitration even if arbitrability is disputed); Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726, 733 (5th Cir.1987) (procedural requirements of statute providing for petition to court to compel arbitration are permissive rather than mandatory); Battle v. Gen. Cellulose Co., 23 N.J. 538, 129 A.2d 865, 868 (1957) (rejecting argument that arbitration could not proceed without court order compelling arbitration).

¶ 8 The statutes at issue in these cases are consistent with our own arbitration statutes and promote the fundamental goal of arbitration: a simple and expeditious alternative to litigation. See NABET, 140 F.3d at 463. When addressing the argument that a pre-arbitration judicial determination of arbitrability was required, the court in NABET noted:

Under [the arbitration opponent's] view, arbitration proceedings must come to a halt, and the party seeking arbitration must bear the burden of obtaining a favorable ruling whenever a party disputes arbitrability. If any and all objections to arbitrability were enough to halt the process pending a court order compelling arbitration, a [defending] party would have an incentive to raise meritless arbitrability issues... and parties would have an incentive to object to arbitrability in order to receive two bites at the apple. A party could object to the arbitrator's jurisdiction, yet wait for the arbitration award to be issued[,] safe in the knowledge that if the award is unfavorable, it can demand a second arbitration [because there has been no pre-arbitration judicial determination].

Id.

¶ 9 Our arbitration statutes and the weight of authority from other jurisdictions allow either a pre-arbitration or a post-arbitration determination of arbitrability.1 Accordingly, we conclude Brake Masters was not required to obtain a pre-arbitration judicial determination of arbitrability.

ARBITRATOR'S AUTHORITY

¶ 10 Gabbay next argues that the trial court erred in confirming the award by finding that the arbitration agreement granted the arbitrator the primary authority to decide the arbitrability of the issues. Brake Masters responds that the evidence supports the trial court's determination that the American Arbitration Association (AAA) Rules of Commercial Dispute Resolution Procedures (Including Mediation and Arbitration Rules) were the arbitrator's "standard rules of arbitration" provided for in the settlement agreement. Brake Masters further notes Rule 8(a) of those rules allows an arbitrator to determine arbitrability as follows: "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."2

I. First Options

¶ 11 Under our arbitration statutes, the party challenging an arbitration award generally has the burden of proving the existence of one of the statutory grounds to vacate the award. Fisher v. Nat'l Gen. Ins. Co., 192 Ariz. 366, ¶ 12, 965 P.2d 100, ¶ 12 (App.1998); see Pawlicki v. Farmers Ins. Co., 127 Ariz. 170, 173, 618 P.2d 1096, 1099 (App.1980)

(statutory grounds exclusive bases for refusing confirmation). But both parties rely on First Options of Chicago v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), as setting forth both the standard of proof a trial court should use in deciding whether to confirm an award when the authority of the arbitrator to decide arbitrability is at issue and the standard of review on appeal. By arguing that First Options applies to the present case, both parties implicitly accept that the Federal Arbitration Act (FAA) governs the arbitration agreement.

¶ 12 In First Options, the Supreme Court identified three types of disagreement that may occur in an arbitration: who should have the primary power to determine arbitrability, whether the dispute is arbitrable, and who should prevail on the merits. Id. at 942, 115 S.Ct. at 1923, 131 L.Ed.2d at 992. In considering the first type of disagreement, the Court was concerned that a party entering into an arbitration contract might not focus on who would determine arbitrability, which might force unwilling parties to arbitrate a matter they had thought a...

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