Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca3-14-04010/USCOURTS-ca3-14-04010-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

__________________________

No. 14-4010

__________________________

SOUTH JERSEY SANITATION COMPANY, INC.

v.

APPLIED UNDERWRITERS CAPTIVE RISK 

ASSURANCE COMPANY, INC.,

Appellant

______________

APPEAL FROM THE UNITED STATES DISTRICT 

COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. No. 1-13-cv-06717)

District Judge: Joseph E. Irenas

_____________

Argued January 20, 2016

______________

Before: JORDAN, HARDIMAN, and GREENAWAY, 

JR., Circuit Judges.

(Opinion Filed: October 25, 2016)

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Susan Karlovich, Esq.

Thomas F. Quinn, Esq. [ARGUED]

Wilson, Elser, Moskowitz, Edelman & Dicker LLP

200 Campus Drive

Florham Park, NJ 07932

 Counsel for Appellant

Louis M. Barbone, Esq. [ARGUED]

Jacobs & Barbone, P.A.

1125 Pacific Avenue

Atlantic City, NJ 08401

Counsel for Appellee

______________

OPINION

______________

GREENAWAY, JR., Circuit Judge.

I. INTRODUCTION

Applied Underwriters Captive Risk Assurance 

Company, Inc. (“Applied Underwriters”), a Berkshire 

Hathaway Company, appeals from the District Court’s denial 

of its motion to compel arbitration in its contract-based 

dispute with Appellee South Jersey Sanitation Company, Inc. 

(“South Jersey”). Because we find that South Jersey’s 

purported challenges to the arbitration agreement apply to the 

parties’ contract as a whole, rather than to the arbitration 

agreement alone, the parties’ dispute is arbitrable and we will 

reverse. 

II. FACTUAL AND PROCEDURAL BACKGROUND

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South Jersey is a trash-removal business with over 

eighty employees. On September 3, 2008, as its workers’

compensation insurance policy neared expiration, South 

Jersey, through its insurance agent, entered into a 

Reinsurance Participation Agreement (“RPA”) with Applied 

Underwriters. The stated purpose of the RPA is to establish 

South Jersey’s participation “in [Applied Underwriters’s] 

segregated protected cell reinsurance program.”1

 (App. 96.)

The RPA, which has a three-year term, contains a oneand-one-half-page arbitration provision, according to which 

“any disputes arising under [the RPA]” would be arbitrated

either in Tortola or in a location on which the parties agreed. 

(App. 98–100.) It also contains a choice-of-law provision, 

which indicates that the RPA “shall be exclusively governed 

by” Nebraska law. (App. 100.) The RPA and its attached 

tables of “Loss Development Factors,” “Exposure Group 

Adjustment Factors,” and “Loss Pick Containment Rates and 

Estimated Annual Amounts,” total ten pages. 

In its complaint, South Jersey alleges that it entered 

into the RPA when its workers’ compensation insurance was 

about to expire in the belief that the RPA was a replacement 

workers’ compensation insurance policy. South Jersey argues

that Applied Underwriters fraudulently presented the RPA as 

such an insurance policy. South Jersey contends that, in 

reality, the RPA is a retrospective rating or “retro” insurance 

policy pursuant to which South Jersey’s premiums for each 

payment policy period would be based on claims paid during 

 1 As noted throughout this opinion, the precise nature 

and effect(s) of the RPA are both actively disputed by the 

parties and unclear from the face of the document itself.

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the previous period. South Jersey alleges that it was promised 

that it could “realize ‘huge rebates’ at the end of the policy 

term in the event that premiums far outweighed the payouts 

required for worker’s compensation benefits.” (App. 2.)

South Jersey also notes in its complaint that Applied 

Underwriters is “not an insurer defined under New Jersey 

statutes” and therefore cannot issue workers’ compensation 

insurance policies in New Jersey. (App. 6.) Nevertheless, in 

its appellate brief, South Jersey posits that “the plain language 

of the RPA clearly relates to, concerns[,] and actually issues a 

workers’ compensation policy to [South Jersey].”2

 (Appellee 

Br. 7.)

Before the District Court, Applied Underwriters

represented that South Jersey purchased a primary workers’ 

compensation insurance policy from Continental Indemnity 

Company (“Continental”). Like Applied Underwriters, 

Continental is a Berkshire Hathaway Company. Continental 

then entered into a pooling agreement with California 

Insurance Company (“California”), another Berskshire 

Hathaway Company. (App. 142–43.) This pooling 

agreement was a reinsurance treaty.3

 Applied Underwriters, 

 2 South Jersey bases this assertion on the following 

language from the RPA: “During the Active Term of this 

Agreement, Workers’ Compensation Insurance coverage will 

be provided to Participant by one or more of the Issuing 

Insurers.” (Appellee Br. 7 (quoting App. 97).)

3 Reinsurance can be viewed as “‘insurance for 

insurance companies,’ . . . whereby a reinsured . . . cedes 

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in turn, provided reinsurance to California and, derivatively, 

to Continental.

According to Applied Underwriters, the RPA was not

a workers’ compensation insurance policy, but rather an 

investment instrument. Applied Underwriters argues that the 

RPA “is simply not an ‘insurance policy,’ but rather a 

contract ‘relating [to] or concerning’ a reinsurance policy.” 

(Appellant Br. 30.) Applied Underwriters further contends

that, under the RPA, if South Jersey “had low cost [workers’ 

compensation] claims, it would receive a profit[-]sharing 

distribution under the RPA from its segregated protected cell. 

If its losses were high, it enjoyed the cap protection of the 

maximum threshold in the RPA.” (Id. at 6.) Essentially, the 

RPA would allow South Jersey to speculate as to its future 

performance under its actual workers’ compensation policy

with Continental by “financially shar[ing] in the underwriting 

results based on actual losses incurred and the size of its 

payroll.” (Appellee Br. 6.) Indeed, Paragraph Three of the 

 

some of its risk to a reinsurer . . . and shares its premium with 

the reinsurer.” Certain Underwriters at Lloyd’s London v. 

Westchester Fire Ins. Co., 489 F.3d 580, 582 n.1 (3d Cir. 

2007) (quoting Cont’l Cas. Co. v. Am. Nat’l Ins. Co., 417 

F.3d 727, 729 n.1 (7th Cir. 2005)). 

“[A] reinsurance treaty involves an agreement by a 

reinsurer ‘to accept an entire block of business from the 

reinsured . . . . Because a treaty reinsurer accepts an entire 

block of business, it does not assess the individual risks being 

reinsured; rather, it evaluates the overall risk pool.’” Id. at 

582 (omission in original) (quoting N. River Ins. Co. v. 

CIGNA Reins. Co., 52 F.3d 1194, 1199 (3d Cir. 1995)).

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RPA indicates that “Participant is participating in this 

Agreement for purposes of investment only.” (App. 96.) 

For two years and ten months of the RPA’s three-year 

period, South Jersey received and paid monthly invoices for 

premiums ranging from $40,000 to $50,000, with the 

expectation of receiving a rebate at the end of the policy 

period. South Jersey based its expected refund on the fact 

that it had “paid in excess of $1,200,000 in premiums” over 

the term of the RPA and that the workers’ compensation 

claims paid on its behalf “totaled the approximate amount of 

$355,000 over three years.”4

 (App. 3.) “In July of 2011[,] 

however, approximately two months before the calculation of 

[South Jersey’s] rebate, [Applied Underwriters] sent a 

premium invoice in the amount of $218,887.04.” (Suppl.

App. 23.) South Jersey alleges that, when it contacted 

Applied Underwriters about this amount, it was told that the 

premium was driven by loss history. 

South Jersey asserts that it paid $60,000 to avoid 

cancellation of the RPA, but that Applied Underwriters 

nevertheless issued a “Notice of Cancellation effective 

August 1, 2011.” (App. 4.) South Jersey then secured a 

workers’ compensation insurance policy with a different 

carrier, and Applied Underwriters continued to send South 

Jersey invoices for fluctuating amounts. Ultimately, Applied 

 4 As the District Court noted, the calculus is, of course,

more complicated than premiums minus claims paid, because 

the policy tail would permit claims to continue well beyond 

the policy term. 

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Underwriters declared that South Jersey owed $300,632.94 in 

an invoice dated September 26, 2012.5 South Jersey did not 

pay, and Applied Underwriters filed a demand for arbitration 

with the American Arbitration Association seeking this 

amount on September 26, 2013. 

On October 31, 2013, South Jersey filed a complaint in 

the New Jersey Superior Court, Chancery Division, seeking 

declaratory relief as to the arbitration provision and rescission 

of the RPA (Counts One and Two), as well as damages for 

breach of contract (Count 3); fraud, intentional 

misrepresentation, and illegality (Count 4); and negligent 

misrepresentation (Count 5). 

On November 4, 2013, Applied Underwriters removed 

the case to federal court on the basis of diversity jurisdiction. 

South Jersey moved to remand the case to state court one 

month later. Applied Underwriters responded by filing a 

motion to dismiss and to compel arbitration in lieu of an 

answer. 

The District Court heard arguments on these motions 

on May 5, 2014, and denied South Jersey’s motion to remand 

that day. On August 25, 2014, the Court denied the motion to 

compel arbitration and ordered Applied Underwriters to file 

an Answer. The District Court based its denial on the 

following findings: (1) Nebraska law governs the dispute

pursuant to the RPA’s choice-of-law clause; (2) Section 25-

2602.01 of the Nebraska Revised Statutes (“the Nebraska 

 5 The District Court asked counsel how that amount 

was calculated but never received an explanation, and the 

record remains obscure on this point. 

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Statute”) “sets forth that all arbitration provisions ‘concerning 

or relating to an insurance policy,’ except those ‘between 

insurance companies,’ are unenforceable” (App. 33); (3) “the 

RPA is not a contract between insurance companies” (App. 

34); (4) the Nebraska Statute preempts the Federal Arbitration 

Act (“FAA”), 9 U.S.C. §§ 1–16,

6 through the McCarranFerguson Act (“M-FA”), 15 U.S.C. §§ 1011–1015;

7 and (5)

the arbitration provision is therefore unenforceable.

 6 Section 2 of the FAA provides: 

A written provision in any maritime transaction 

or a contract evidencing a transaction involving 

commerce to settle by arbitration a controversy 

thereafter arising out of such contract or 

transaction, or the refusal to perform the whole 

or any part thereof, or an agreement in writing 

to submit to arbitration an existing controversy 

arising out of such a contract, transaction, or 

refusal, 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. 

7 The M-FA provides in relevant part that “[n]o Act of 

Congress shall be construed to invalidate, impair, or 

supersede any law enacted by any State for the purpose of 

regulating the business of insurance, or which imposes a fee 

or tax upon such business, unless such Act specifically relates 

to the business of insurance[.]” 15 U.S.C. § 1012. Thus, 

“[u]nder [the M-FA], state laws reverse[-]preempt federal 

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Applied Underwriters filed a notice of appeal on 

September 19, 2014. It argues that the District Court erred in 

reaching the issue of reverse-preemption without first 

considering whether arbitrability is a question for the courts 

or the arbitrator; that arbitrability is, in fact, a question for the 

arbitrator under the terms of the RPA; that the Nebraska 

statute does not reverse-preempt the FAA; and that, even if it 

did, the Nebraska Statute is inapposite, inasmuch as the RPA 

does not fall within its purview. 

South Jersey counters that the District Court properly 

determined that the RPA falls within the scope of the 

Nebraska Statute, that the Nebraska Statute reverse-preempts 

the FAA, and that the RPA’s arbitration provision is therefore 

unenforceable. South Jersey adds that Count Four of its 

Complaint, entitled “Fraud, Intentional Misrepresentation and 

Illegality” (App. 12.), “serves as an additional basis to 

invalidate the arbitration agreement, or the contract as a 

whole, without contravening the FAA” (Appellee Br. 5).

 

laws if (1) the state statute was enacted ‘for the purpose of 

regulating the business of insurance,’ (2) the federal statute 

does not ‘specifically relate to the business of insurance,’ and 

(3) the federal statute would ‘invalidate, impair, or supersede’

the state statute.” Suter v. Munich Reins. Co., 223 F.3d 150, 

160 (3d Cir. 2000).

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III. JURISDICTION & STANDARD OF REVIEW

The District Court had jurisdiction pursuant to 28 

U.S.C. § 1332(a); this Court has jurisdiction pursuant to 9 

U.S.C. § 16(a)(1)(C) and 28 U.S.C. § 1292(a)(1).

Our review of all facets of this appeal is plenary. First, 

“[w]e exercise plenary review over questions regarding the 

validity and enforceability of an agreement to arbitrate.” 

Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 177 (3d Cir. 

2010) (en banc). Second, because preemption determinations 

are questions of law, we review such determinations de novo. 

Horn v. Thoratec Corp., 376 F.3d 163, 166 (3d Cir. 2004) 

(citations omitted). Finally, to the extent that this appeal 

requires construction of statutory or contractual provisions, 

our review is also plenary. Viera v. Life Ins. Co. of N. Am., 

642 F.3d 407, 413 (3d Cir. 2011) (contracts); Seamans v. 

Temple Univ., 744 F.3d 853, 859 (3d Cir. 2014) (statutes).

IV. ANALYSIS

“Congress enacted the [FAA] ‘to reverse the 

longstanding judicial hostility to arbitration agreements . . . 

and to place arbitration agreements upon the same footing as 

other contracts.’” Puleo, 605 F.3d at 177–78 (second 

alteration in original) (quoting Spinetti v. Serv. Corp. 

Int’l, 324 F.3d 212, 218 (3d Cir. 2003)). Although the FAA 

favors arbitration and limits the involvement of the court 

system in contracts that provide for arbitration, “[l]ike other 

contracts, [arbitration agreements] may be invalidated by 

‘generally applicable contract defenses, such as fraud, duress, 

or unconscionability.’” Rent-A-Ctr., W., Inc. v. Jackson, 561 

U.S. 63, 68 (2010) (quoting Doctor’s Assocs., Inc. v. 

Casarotto, 517 U.S. 681, 687 (1996)). Accordingly, where a 

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party challenges the validity of an otherwise controlling 

arbitration clause, courts hear that challenge. See id. at 71 

(“If a party challenges the validity under [FAA] § 2 of the 

precise agreement to arbitrate at issue, the federal court must 

consider the challenge before ordering compliance with that 

agreement under [FAA] § 4.”). 

The challenge, however, must focus exclusively on the 

arbitration provision, rather on than the contract as a whole. 

As the Supreme Court stressed in Rent-A-Center, “only [an

arbitration provision-specific] challenge is relevant to a 

court’s determination whether the arbitration agreement at 

issue is enforceable.” Id. at 70. If the challenge encompasses 

the contract as a whole, the validity of that contract, like all 

other disputes arising under the contract, is a matter for the 

arbitrator to decide. See id.

The RPA’s arbitration provision, like the 

comprehensive arbitration agreement at issue in Rent-ACenter, applies to “[a]ll disputes arising with respect to any 

provision of” the RPA and confers “binding and conclusive” 

authority on the arbitrator. (App. 99.) Thus, unless South 

Jersey specifically challenges the legal validity of the RPA’s

arbitration provision, the parties’ present dispute, which arises 

out of the RPA, is subject to arbitration. 

We find that neither of South Jersey’s challenges focus 

on the arbitration provision alone, and we therefore reverse 

the District Court’s denial of Applied Underwriters’s motion 

to compel arbitration.

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A. Fraud, Intentional Misrepresentation, and Illegality

In its complaint, South Jersey sets forth its fraud-based 

challenge in the following terms:

35. Defendant Applied Underwriters did at all 

times relevant hereto factually misrepresent the 

terms and conditions of its contract, so as to 

induce plaintiff to pay premiums totaling in 

excess of $1,200,000 while at the same time 

contracting with an insurer to pay worker’s 

compensation losses of approximately one-third 

of those premiums. Defendant did by its false 

factual representations induce plaintiff’s 

reasonable expectation and reliance upon a 

term-end rebate given its employment and loss 

history in worker’s compensation. Defendant’s 

factual representations were false, as 

demonstrated by the defendant’s admission that 

its premiums were “inflated[.”] Defendant 

knew that it had represented and induced 

plaintiff’s participation in its contract of 

reinsurance by representing plaintiff’s 

entitlement to a rebate, and by further, over a 

period of thirty-four months[,] consistently 

billing the plaintiff for policy premiums of 

between $40,000 and $50,000. Ultimately, 

when plaintiff was to realize its substantial 

rebate given premiums paid in comparison to its 

loss history, defendant manipulated its 

“estimates” and fictitious formulas to avoid 

payment of that rebate and to instead threaten

plaintiff with cancellation if the inflated and 

fictitious premiums were not paid.

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36. Defendant has[,] by virtue of the aforenoted 

conduct, committed fraud upon the plaintiff 

pursuant to unconscionable contractual terms 

and conditions in violation of New Jersey law 

and public policy.

(App. 12–13.)

It is plain from these paragraphs that South Jersey 

alleges no arbitration provision-specific fraud, but rather 

challenges the arbitration provision only as part of its general 

challenge of the contract. Indeed, South Jersey states in its 

brief that “[f]raud is a defense that is generally applicable to 

all contracts and can invalidate a whole contract or certain 

portions thereof, including arbitrations [sic] agreements.” 

(Appellee Br. 4 (citation omitted).) 

Even before Rent-A-Center, however, it was plain that 

a wholesale fraud defense could not defeat a clear arbitration 

provision. Almost fifty years ago, the Supreme Court 

confronted “the question whether the federal court or an 

arbitrator is to resolve a claim of ‘fraud in the inducement,’ 

under a contract governed by the [FAA], where there is no 

evidence that the contracting parties intended to withhold that 

issue from arbitration.” Prima Paint Corp. v. Flood & 

Conklin Mfg. Co., 388 U.S. 395, 396–97 (1967). The Court 

held that, “if the claim is fraud in the inducement of the 

arbitration clause itself—an issue which goes to the ‘making’ 

of the agreement to arbitrate—the federal court may proceed 

to adjudicate it.” Id. at 403–04. “But,” the Court added, “the 

[FAA] does not permit the federal court to consider claims of 

fraud in the inducement of the contract generally.” Id. at 404; 

accord Rent-A-Ctr., 561 U.S. at 70–72 (noting that challenges 

to a contract as a whole are not relevant to a court’s 

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determination of the enforceability of the arbitration clause, 

which is treated as severable).

In light of this clear and longstanding precedent, we

conclude that South Jersey’s claim of fraud should be left for 

the arbitrator’s consideration. We accordingly turn to South 

Jersey’s second argument in favor of invalidating the 

arbitration provision—that the provision is unenforceable 

under Nebraska law.

B. The Effect of the Nebraska Statute

On its face, South Jersey’s contention that the RPA’s 

arbitration provision is rendered unenforceable by the 

Nebraska Statute appears to target the arbitration provision 

alone, rather than the contract as a whole. This argument, 

however, suffers from the same defect as South Jersey’s fraud 

argument because—regardless of whether the Nebraska 

Statute reverse-preempts the FAA8

—that statute must first be 

shown to apply to the arbitration provision at issue. We 

determine that it is not clear that the short but obscure RPA 

falls within the ambit of the Nebraska Statute.

South Jersey, as the party seeking to avoid the 

arbitration provision, bears the burden of showing that it falls 

 8 We do not decide here whether the Nebraska Statute 

reverse-preempts the FAA because South Jersey has not 

persuaded us that the Nebraska Statute is applicable to the 

contract at issue. To determine its applicability, the precise 

function and contours of the RPA must be elucidated, and that 

is a matter for the arbitrator under the parties’ clear and 

expansive arbitration agreement. 

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within Subsection (f)(4) of the Nebraska Statute. See, e.g., 

Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92 

(2000) (“[T]he party seeking to avoid arbitration bears the 

burden of establishing that Congress intended to preclude 

arbitration of the statutory claims at issue.” (citation 

omitted)). 

The Nebraska Statute provides in relevant part:

 (b) A provision in a written contract to submit 

to arbitration any controversy thereafter arising 

between the parties is valid, enforceable, and 

irrevocable, except upon such grounds as exist 

at law or in equity for the revocation of any 

contract, if the provision is entered into 

voluntarily and willingly.

. . . .

(f) Subsection (b) of this section does not apply 

to:

. . . .

(4) Except as provided in section 44-811, any 

agreement concerning or relating to an 

insurance policy other than a contract between 

insurance companies including a reinsurance 

contract.

Neb. Rev. Stat. § 25-2602.01 (emphases added). 

In Kremer v. Rural Community Insurance Co., 788 

N.W.2d 538, 550 (Neb. 2010), the Nebraska Supreme Court 

stated that, “under § 25–2602.01(f)(4), agreements to arbitrate 

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future controversies concerning an insurance policy are 

invalid.” Noting that “[e]very federal appellate court to 

address this issue has held that state laws restricting 

arbitration provisions in insurance contracts regulate the 

business of insurance and are not preempted by the FAA,” id.

at 552 (citations omitted), the Nebraska Supreme Court

“conclude[d] that a statute precluding the parties to an 

insurance contract from including an arbitration agreement 

for future controversies regulates the insurer-insured 

contractual relationship,” id. at 553. In reaching this 

conclusion, the court noted that it did not consider dispositive 

“whether statutes restricting arbitration agreements in 

insurance policies affect the transfer of risk.” Id. at 552. This 

language, while dicta, strongly suggests that Subsection (f)(4) 

of the Nebraska Statute applies only to insurance policies 

themselves, and that “any agreement” must be read as an 

arbitration agreement or provision within such a policy, rather 

than a derivative investment contract.9

 

South Jersey’s assertion that “the RPA clearly relates 

to, concerns and actually issues a workers’ compensation 

policy to [South Jersey]” (Appellant Br. 7) is not sufficient to 

carry South Jersey’s burden of demonstrating that the RPA is 

an “agreement concerning or relating to an insurance policy” 

 9 We note that this construction of the Nebraska 

Statute, which reads the phrase “any agreement concerning or 

relating to an insurance policy” narrowly, comports with the 

M-FA, which permits reverse-preemption only by those state 

statutes “regulating the business of insurance.” 15 U.S.C. 

§ 1012.

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within the meaning of the Nebraska Statute. First, the 

argument fails to address what degree of “concern” or 

“relation” to an insurance contract is necessary to bring an 

agreement under Subsection (f)(4). Second, that assertion is 

at odds with South Jersey’s own argument that Applied 

Underwriters is not an insurer, as well as with Applied 

Underwriters’s contention that the RPA is an investment 

instrument. Finally, the District Court never found that the 

RPA falls within the ambit of the Nebraska Statute, despite 

repeatedly expressing concern as to the indecipherability of 

the RPA. (See App. 139, 141, 148, 151, 167, 176.) 

Faced with a disputed agreement whose fundamental

nature remains obscure, we conclude that, by the clear and 

comprehensive arbitration provision in the RPA, it is for the 

arbitrator to determine what the precise nature of the RPA is 

and whether the RPA falls within Subsection (f)(4). This 

challenge, like the fraud challenge, implicates the RPA as a 

whole; like the fraud challenge, therefore, the question of 

whether the RPA’s arbitration provision is enforceable under 

Nebraska law is a question for the arbitrator.

IV. CONCLUSION

For the foregoing reasons we will vacate the judgment 

of the District Court and remand the matter. If the District 

Court determines that the parties agree to arbitrate this dispute 

in New Jersey,

10 we direct that the District Court refer the 

 10 Paragraph 13(I) of the agreement provides: “All 

arbitration proceedings shall be conducted in the English 

language in accordance with the rules of the American 

Arbitration Association and shall take place in Tortola, 

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matter to arbitration. On the other hand, if the District Court 

determines that there is no such agreement, then the District 

Court shall decide, in the first instance, how to proceed in 

light of its inability to compel arbitration in the default 

location provided for in the contract. See Econo-Car Int’l, 

Inc. v. Antilles Car Rentals, Inc., 499 F.2d 1391, 1394 (3d 

Cir. 1974) (noting the requirement that “arbitration ‘shall be 

within the district in which the petition for an order directing 

such arbitration is filed’” (quoting 9 U.S.C. § 4)).

 

British Virgin Islands or at some other location agreed to by 

the parties.” (App. 99.)

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