Rogers v. Swepi LP, 121018 FED6, 18-3229

Docket Nº:18-3229
Opinion Judge:SILER, CIRCUIT JUDGE.
Party Name:MATT A. ROGERS, Plaintiff-Appellee, v. SWEPI LP, et al., Defendants-Appellants.
Judge Panel:BEFORE: SILER, MOORE, and ROGERS, Circuit Judges. KAREN NELSON MOORE, Circuit Judge, dissenting in part and concurring in part.
Case Date:December 10, 2018
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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MATT A. ROGERS, Plaintiff-Appellee,

v.

SWEPI LP, et al., Defendants-Appellants.

No. 18-3229

United States Court of Appeals, Sixth Circuit

December 10, 2018

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO

BEFORE: SILER, MOORE, and ROGERS, Circuit Judges.

SILER, CIRCUIT JUDGE.

In October 2011, Matt A. Rogers and Shell[1] entered into a lease agreement governing extraction of oil and gas from Rogers's five-acre property located in Guernsey County, Ohio. Important to Rogers, the agreement provides a signing bonus of $5, 000 per acre, contingent upon Shell's timely verification that Rogers possesses good title to the property. Important to Shell, the lease contains a broad arbitration clause, providing that any dispute under the lease be resolved by binding arbitration. Rogers has sued for breach of contract, individually and on behalf of other landowners having similar contracts with Shell, alleging that Shell failed to pay the signing bonuses.

Currently before the panel is the district court's denial of Shell's motion to compel arbitration. Because Rogers's argument against arbitration attacks much more than the arbitration clause itself, the district court's judgment is REVERSED and the case is REMANDED to the district court for entry of an order compelling arbitration and a decision on whether the Lease allows for class-wide arbitration.

FACTUAL AND PROCEDURAL BACKGROUND

This litigation has not yet reached the question of whether Shell's alleged failure to pay the signing bonus constitutes a breach of the contract between itself and Rogers. This appeal asks: who decides the arbitrability of the dispute and, if it is a federal court, how should it be decided? Additionally, the parties ask the Court to determine whether the lease agreement allows for class procedures in arbitration.

According to Rogers, the lease's arbitration clause did not trigger until Shell paid the signing bonus; since Shell did not pay the bonus, he argues that the arbitration clause never became effective. Shell argues that Rogers attacks much more than the arbitration clause-he attacks nearly the entire contract. Thus, the arbitration dispute should never have been decided by the district court. And even if the district court had the power to decide the arbitration dispute, the lease's broad arbitration clause compels arbitration. The district court agreed with Rogers, denying Shell's motion. Shell appeals.

The agreement between Rogers and Shell is memorialized in the "Oil and Gas Lease," a document having 41 numbered sections covering various aspects of the parties' relationship. The first line of the agreement defines the term "Lease" as the "Oil and Gas Lease." The parties proceed to use the term "Lease" repeatedly throughout the document.

Only a few of the Lease's provisions are relevant to this appeal. Section One of the Lease includes the granting clause, under which Rogers conveyed a leasehold interest to Shell for the purpose of oil and gas exploration and production. Section Eight provides that "[t]his Lease shall become effective on the date that this Lease is signed by the Lessor." Section Thirty-Three provides that, if the parties do not agree to non-binding mediation, "[a]ny dispute that arises under this Lease . . . shall be resolved by binding arbitration . . . ." It is undisputed that Rogers signed the agreement in 2011.

The signing bonus clause is contained in Section Sixteen: Lessee agrees to pay Lessor a signing bonus of Five Thousand Dollars ($5, 000.00) for each acre contained within the Leased Premises subject to Lessee's verification of Lessor's marketable title. Lessee shall have up to one hundred twenty (120) days after the Effective Date to verify Lessor's marketable title to the Leased Premises . . . . By Lessor's signing this Lease, Lessor promises to proceed with this Lease and be bound thereby upon Lessee's paying the full amount of the bonus payment.

Finally, Section Twenty-Five of the Lease provides that, "[u]pon this Lease taking effect (thus, upon Lessor's receipt of the bonus payment), Lessee's obligations under this Lease shall not be diminished or affected by any title encumbrance on the Leased Premises . . . ."

Before the district court, Shell focused on the language of Sections Eight and Thirty-Three as a basis for compelling arbitration-arguing that the Lease constituted a single agreement, signed and executed by Rogers, and commanded that disputes under the Lease be arbitrated. Rogers relied on the language in Section Twenty-Five and the final sentence of Section Sixteen, arguing that the lease agreement was executed in stages, with his signature allowing Shell to encumber the property and verify title, and Shell's payment of the signing bonus effectuating all remaining aspects, including the arbitration clause. The district court endorsed Rogers's view: Plaintiff correctly describes the Lease as follows: "while the Lease became 'effective' upon Rogers' signature for purposes of allowing [Shell] to encumber the property and verify title, the last sentence of [the bonus payment clause] shows that the parties' remaining obligations (the long-term relational aspects of the Lease) did not become effective-and Rogers was not 'bound thereby'-until the signing bonus was paid." This interpretation provides meaning to the bonus payment clause and harmonizes it with the rest of the Lease.

With no evidence that Shell made the bonus payment to Rogers, the district court found that the second stage of the contract, including the arbitration clause, never took effect and denied Shell's motion to compel arbitration.

The district court failed to address the threshold issue of who decides arbitrability. It assumed it did, and then denied arbitration. But because Rogers attacks more than just the arbitration clause, an arbitrator must consider the issue first. Therefore, the district court's decision must be reversed.

STANDARD OF REVIEW AND LEGAL STANDARD

"We review a district court's denial of a motion to compel arbitration de novo." Johnson Assocs. Corp. v. HL Operating Corp., 680 F.3d 713, 716 (6th Cir. 2012) (internal quotation marks and citation omitted). Moreover, the proper construction of a contract is an issue of law; "therefore, this court reviews questions of contract interpretation under a de novo standard." Answers in Genesis of Ky., Inc. v. Creation Ministries Int'l, Ltd., 556 F.3d 459, 465 (6th Cir. 2009) (citation omitted).

The parties agree that the Federal Arbitration Act ("FAA") applies to this dispute because the contract at issue involves commerce and contains an arbitration clause. Agreements to settle controversies arising out of such contracts through arbitration, "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

DISCUSSION

I.

Who decides arbitrability?

We must decide who-an arbitrator or a federal court-should hear Rogers's defense to the arbitration provision. The district court failed to address this threshold issue, jumping directly to the dispute itself.

Relying on Granite Rock Co. v. International Brotherhood of Teamsters, Rogers argues that his attack on the arbitration clause goes to its formation, and thus it was proper for the district court to decide the dispute. See 561 U.S. 287, 296 (2010) ("It is similarly well settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide." (citations omitted)). But in this case, there is no question regarding formation (whether "the parties ever agreed to the contract in the first place"). Teamsters Local Union 480 v. United Parcel Serv., Inc., 748 F.3d 281, 289 (6th Cir. 2014) (citing Granite Rock, 561 U.S. at 296). Rogers does not dispute that he properly agreed to the Lease by signing it in 2011. His attack on the arbitration provision assumes that the contract was formed; that it conferred obligations on the parties; and that Shell failed to perform one of its obligations, meaning the arbitration clause was never triggered.

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