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United States v. Selective Insurance Co.

United States District Court, D. Maryland, Southern Division

December 17, 2018

UNITED STATES OF AMERICA f/u/b NATIONAL FIRE PROTECTION, LLC Plaintiff,
v.
SELECTIVE INSURANCE COMPANY and DCM ARCHITECTURE AND ENGINEERING, LLC, Defendants.

          MEMORANDUM OPINION

          GEORGE J. HAZEL, UNITED STATES DISTRICT JUDGE

         This action is brought by the United States of America for the Use and Benefit of National Fire Protection, LLC (“NFP”) against Defendants Selective Insurance Company of America (“Selective”) and DCM Architecture and Engineering, LLC (“DCM') regarding DCM's alleged breach of a subcontract with NFP. DCM has initiated a proceeding with the American Arbitration Association pursuant to the same project and contract, bringing its own claims related to the alleged breach.

         Defendants filed a Motion to Dismiss, ECF No. 24, asserting that the subcontract contains an enforceable arbitration clause that deprives the Court of jurisdiction. Plaintiff has filed a motion for summary judgment, ECF No. 18, asking the Court to find the arbitration clause unenforceable as a matter of law. Plaintiff has also filed a motion for preliminary injunction, ECF No. 20, asking the Court to stay the arbitration proceedings. No. hearing is necessary. See Loc. R. 105.6 (D. Md. 2016). For the following reasons, Defendants' Motion to Dismiss, ECF No. 24, is denied. Plaintiff's Motion for Summary Judgment, ECF No. 18, is granted, and Plaintiff's Motion for Preliminary Injunction, ECF No. 20, is denied as moot.[1]

         I. BACKGROUND[2]

         DCM was the general contractor on a project in Woodlawn, Maryland, pursuant to a prime contract with the United States General Services Administration. ECF No. 15 ¶ 15. DCM and NFP contracted for NFP to perform fire sprinkler work for the project in exchange for $92, 580. Id. ¶ 10. NFP completed the project on August 29, 2017, but DCM did not pay the agreed-upon amount. Id. ¶¶ 11, 14. The contract between the parties states that the “[DCM], at its sole discretion, may demand arbitration” and “[a]ny claim arising out of or related to the contract shall, at [DCM's] sole discretion, be subject to arbitration.” ECF No. 18-2 at 10, 17.[3]The contract also provides that its terms shall by governed by the state law where the project is located. ECF No. 18-2 at 17.

         On November 13, 2017, DCM filed an arbitration demand pursuant to these clauses against NFP for $149, 000. ECF No. 15 ¶¶ 19-20. On January 23, 2018, NFP filed its first Complaint in federal district court. ECF No. 1.

         II. STANDARD OF REVIEW

         Defendants move to dismiss for lack of subject-matter jurisdiction pursuant to Fed R. Civ. P. 12(b)(1), arguing that the arbitration clause strips this Court of jurisdiction to consider Plaintiff's claims. See ECF No. 24-1 at 3. In a challenge to the factual basis for subject-matter jurisdiction such as this one, it is the plaintiff's burden to prove that subject-matter jurisdiction exists. See Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991). The Court is to “regard the pleadings' allegations as mere evidence on the issue, ” and applies “the standard applicable to a motion for summary judgment, under which the nonmoving party must set forth specific facts beyond the pleadings to show that a genuine issue of material fact exists.” Id.

         Plaintiffs, on the other hand, seek summary judgment on Count II of the Complaint, asking for a declaratory judgment that the arbitration clauses in the contract are unenforceable as a matter of law. Summary judgment is appropriate when the pleadings and evidence demonstrate that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

         III. DISCUSSION

         Under the Federal Arbitration Act (“FAA”), a written agreement to arbitrate in a “contract evidencing a transaction involving commerce” is “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. The FAA establishes a “federal policy favoring arbitration, ” and the Court must “resolve any doubts concerning the scope of arbitrable issues in favor of arbitration.” Noohi v. Toll Bros., Inc., 708 F.3d 599, 605 (4th Cir. 2013) (cleaned up). This policy requires courts to “place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.” Id. at 606 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)).

         Arbitration agreements may still be “invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Concepcion, 563 U.S. at 339 (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). “Generally, the rights and obligations under the parties' contract are governed by state law.” Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 474 (1989). The parties do not dispute that Maryland law governs the contract here. See ECF No. 18-2 at 17. Therefore, the Court must determine whether, under Maryland law and the FAA, the arbitration provisions at issue are enforceable.

         This case is governed squarely by the Court of Appeals (“COA”) of Maryland's decision in Cheek v. United Healthcare, 378 Md. 139 (Md. 2003), which was applied by the Fourth Circuit in Noohi. In Cheek, the Maryland COA considered whether an arbitration agreement between an employer and employee in which the employer reserved the right to “alter, amend, modify, or revoke the Policy at its sole and absolute discretion” was void for lack of consideration. Cheek, 378 Md. at 142. The employer contended the agreement was enforceable because it promised to “provide [the employee] employment for . . . [his] promise to abide by the terms of the arbitration agreement, ” but the court disagreed. Id. at 145. Explaining that “[a] promise becomes consideration for another promise only when it constitutes a binding obligation, ” the Maryland COA held instead that the agreement was an “illusory promise:” one that did “not actually bind or obligate the [employer] to anything.” Id. at 148. Because Maryland considers an “arbitration clause of a larger contract to be severable” from the remainder of the contract, it requires consideration for the arbitration agreement itself. Id. at 153. The COA held that “[i]n an enforceable arbitration agreement . . . each party has promised to arbitrate disputes arising from an underlying contract, and each promise provides consideration for the other.” Id. (internal quotations omitted). But where only one party has the “sole and absolute discretion” to arbitrate, there has been no mutual exchange of promises to arbitrate, and the agreement is void for lack of consideration. Id.

         In Noohi, the Fourth Circuit applied Cheek to an arbitration agreement between a class of home buyers and a real estate development company. 708 F.3d at 601. After finding that Cheek requires that “consideration for an arbitration provision must be in the provision itself, ” id. at 609, the Fourth Circuit considered whether Cheek was “inconsistent with the Supreme Court's holding in Concepcion because it singles out arbitration provisions by imposing on them a requirement inapplicable to other contract provisions, ” and thus was preempted by the FAA, id. at 605.[4] Recognizing that the “Supreme Court has long held that ‘[courts] may not . . . invalidate arbitration agreements under state laws applicable only to arbitration provisions, '” the court nonetheless concluded that Cheek “treat[s] an arbitration provision like any stand-alone contract, requiring consideration.” Id. at 612 ...


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