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Parties Cannot Delegate Issues Of Arbitration Agreement Formation To The Arbitrator
DHI Mortgage Company, Ltd. (DHIM) hired Robert Ahlstrom as a loan officer. During the onboarding process, Ahlstrom signed a mutual arbitration agreement with DHIM’s parent company, D.R. Horton, Inc., (D.R. Horton) agreeing that “all legal disputes and claims between them, including without limitation those relating to [Ahlstrom]’s employment with [D.R. Horton] or any separation therefrom and claims by [Ahlstrom] against [D.R. Horton]’s parents, subsidiaries, affiliates, directors, employees, or agents, shall be determined exclusively by final and binding arbitration” and that the arbitrator would have exclusive authority to resolve any dispute relating to the formation, enforceability, applicability, or interpretation of the arbitration agreement.
About eight months after leaving his employment with DHIM, Ahlstrom filed a class-action lawsuit in federal court against DHIM’s parent company, D.R. Horton, Inc. D.R. Horton moved to compel arbitration. The district court granted the motion, ordered Ahlstrom’s individual claims to arbitration, and dismissed Ahlstrom’s class action claims pending resolution of the arbitration. Ahlstrom did not appeal. Ahlstrom then filed a class-action lawsuit in state court against DHIM for identical causes of action as he had alleged against D.R. Horton. DHIM removed the action to federal court and moved to compel arbitration and to dismiss Ahlstrom’s class action claims. This time, Ahlstrom opposed the motion, contending that the arbitration agreement was never properly formed. The district court granted DHIM’s motion and concluded that Ahlstrom’s argument that the arbitration agreement was not properly formed could not be decided by the court and must be decided by the arbitrator consistent with the terms of the arbitration agreement.
On appeal, the Ninth Circuit Court of Appeals found that parties cannot delegate issues of whether an arbitration agreement is valid or properly formed to the arbitrator. The Court of Appeals further explained that when a party to an arbitration agreement challenged the very existence of an agreement to arbitrate, a court is required to address the challenge and determine whether an arbitration agreement existed before it can grant a motion to compel arbitration.
The Court of Appeals then addressed whether there was a properly formed arbitration agreement between Ahlstrom and DHIM. The court noted that the arbitration agreement was between Ahlstrom and D.R. Horton, the agreement contemplated an employee/employer relationship, and there was no evidence that Ahlstrom and D.R. Horton shared an employee/employer relationship. The court continued that the arbitration agreement as drafted, described and governed a relationship between Ahlstrom and D.R. Horton that did not exist. Thus, there was no properly formed agreement to arbitrate.
Therefore, the Court of Appeals reversed the district court’s grant of DHIM’s motion to compel arbitration and remanded the case to the district court to conduct further proceedings consistent with its opinion.
Ahlstrom v. DHI Mortgage Company, Ltd., L.P. (9th Cir. 2021) 21 F.4th 631.
This case indicates that a term in an arbitration agreement that delegates formation issues to the arbitrator, may not be enforceable. In the event a party to the arbitration agreement challenges the very formation of the agreement, a court would first hear and reach a decision on that challenge before any arbitration could proceed.