Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-03-03329/USCOURTS-ca8-03-03329-0/pdf.json

Parties Involved:
American Home Assurance Company
Appellee
Pro Tech Industries
Appellant
URS Corporation
Appellee

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-3329

___________

Pro Tech Industries, Inc., d/b/a Fusion *

Seal Corporation, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the Eastern

* District of Missouri. 

URS Corporation, d/b/a URS Group, *

Inc.; American Home Assurance *

Company, *

*

Appellees. *

___________

 Submitted: April 13, 2004

 Filed: July 27, 2004

___________

Before MORRIS SHEPPARD ARNOLD, RILEY, and COLLOTON, Circuit

Judges.

___________

RILEY, Circuit Judge.

This appeal asks whether the parties should be compelled to arbitrate a dispute.

The parties clearly agreed to arbitrate, and the dispute falls squarely within their

broad arbitration agreement. However, Pro Tech Industries, Inc. (Pro Tech) contends

the agreement to arbitrate is unenforceable because (1) URS Corporation (URS)

failed to make a required demand for arbitration of Pro Tech’s claims, and URS

thereby waived its right to arbitrate, and (2) Pro Tech cannot now afford to arbitrate,

Appellate Case: 03-3329 Page: 1 Date Filed: 07/27/2004 Entry ID: 1792492 
1

Pro Tech’s notice of appeal suggests it is appealing the decision of the district

court dismissing without prejudice Pro Tech’s claims against American Home

Assurance Company. Pro Tech failed to raise this claim in their initial brief before

this court. “Claims not raised in an initial brief are waived, and we generally do not

consider issues raised for the first time on appeal in a reply brief.” Mahaney v.

Warren County, 206 F.3d 770, 771 n.2 (8th Cir. 2000) (citation omitted). We see no

reason to depart from our rules in this case.

2

The Honorable Rodney W. Sippel, United States District Judge for the Eastern

District of Missouri.

-2-

rendering the arbitration agreement unconscionable.1 The district court2 compelled

arbitration and dismissed the lawsuit. Because the issue of waiver is for the arbitrator

to decide and because the issue whether Pro Tech can afford the cost of arbitration

is “speculative,” we affirm, adhering to the strong federal policy favoring arbitration,

see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985), and Federal

Arbitration Act, 9 U.S.C. §§ 1-16.

I. BACKGROUND

In December 2001, Pro Tech, a Missouri corporation, agreed to provide URS,

a Texas corporation, with pipe, pipe fittings, pipe fusion, and leak testing for an

environmental reclamation facility being built at the White Sands Test Facility

operated by NASA (White Sands project). URS was the general contractor on the

White Sands project, let bids for the pipe work, selected Pro Tech for the work, and

negotiated with Pro Tech.

The parties memorialized the terms of this joint undertaking in a written

agreement (Agreement). Under the Agreement, URS and Pro Tech agreed to arbitrate

“[a]ll claims, disputes and other matters . . . arising out of, or relating to” the

Agreement. A choice-of-law provision, included in twelve-point bold-face type,

specified that the subcontract agreement “shall be interpreted, construed and

governed under the laws of . . . Texas.” In the event of a dispute, the Agreement

Appellate Case: 03-3329 Page: 2 Date Filed: 07/27/2004 Entry ID: 1792492 
-3-

mandates “[n]otice of demand for arbitration shall be filed in writing with the other

party to [the] Agreement in accordance with the rules of the American Arbitration

Association.” 

In July 2002, a dispute arose, ultimately leading URS to invoke the arbitration

provision. The dispute stemmed from Pro Tech removing its equipment and

personnel from the White Sands project and ceasing to provide any further services,

notwithstanding substantial work remaining under the Agreement. This occurred

despite URS having paid Pro Tech in excess of $424,000 of the $471,071 total

contract price. In November 2002, Pro Tech filed an action in Missouri state court,

claiming (1) URS owed Pro Tech money under the Agreement; (2) Pro Tech was

entitled to additional compensation for performing extra work not included in the

Agreement; and (3) URS coerced Pro Tech into providing this extra work. Pro Tech

sought compensatory damages in excess of $200,000 and punitive damages in excess

of $2,000,000. URS removed the case to the federal district court on diversity

grounds.

URS moved to dismiss and to compel arbitration, citing the Agreement’s

arbitration provision. The district court held the arbitration provision was enforceable

and Pro Tech’s claims against URS were subject to that arbitration provision. The

court granted URS’s motion to compel arbitration, but refused to dismiss Pro Tech’s

claims. Instead, the district court stayed the case, pending the outcome of arbitration.

The district court advised the parties that, if neither party initiated arbitration within

thirty days of the court’s order, the court would deem that failure to be a novation of

the contract and a waiver of the right to arbitrate. 

Within thirty days of the district court’s order, URS served its demand for

arbitration on Pro Tech and filed the demand with the American Arbitration

Association (AAA). The demand asserted a claim by URS against Pro Tech and

requested that Pro Tech pursue any claims against URS in arbitration. Pro Tech

Appellate Case: 03-3329 Page: 3 Date Filed: 07/27/2004 Entry ID: 1792492 
-4-

subsequently moved to vacate the district court’s order asserting URS’s demand was

not sufficient to initiate arbitration of Pro Tech’s claims, and URS had therefore

waived its right to arbitrate those claims. Pro Tech also moved to bar arbitration of

all claims, contending it did not have the financial resources to participate in

arbitration. Because of this alleged poverty, Pro Tech asked the district court to

declare the arbitration provision unconscionable.

The district court denied Pro Tech’s motion to vacate, concluding URS had not

waived its right to arbitrate Pro Tech’s claims. The district court also denied Pro

Tech’s motion to bar arbitration of all claims, concluding the costs did not render the

Agreement unconscionable. The district court dismissed Pro Tech’s claims, holding

the parties’ dispute must be resolved by arbitration pursuant to the Agreement’s

arbitration provision. Pro Tech appeals.

Pro Tech presents three reasons why it should not be forced to arbitrate its

claims against URS: (1) URS waived its right to compel arbitration; (2) URS’s

demand for arbitration was insufficient; and (3) the arbitration provision is

unenforceable, because Pro Tech cannot now afford arbitration. We first ask whether

these contentions are “gateway matters” that courts, not arbitrators, must decide.

Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, ___, 123 S. Ct. 2402, 2407 (2003)

(holding courts must decide “certain gateway matters, such as whether the parties

have a valid arbitration agreement at all or whether a concededly binding arbitration

clause applies to a certain type of controversy”).

II. DISCUSSION

We review de novo the district court’s decision to compel arbitration. See

Keymer v. Mgt. Recruiters Int’l., Inc., 169 F.3d 501, 504 (8th Cir. 1999). “Factual

findings are reviewed for clear error.” Faber v. Menard, Inc., 367 F.3d 1048, 1051

(8th Cir. 2004) (quoting Dobbins v. Hawk’s Enters., 198 F.3d 715, 717 (8th Cir.

1999)). We recognize an agreement to arbitrate is a matter of contract, and “is a way

Appellate Case: 03-3329 Page: 4 Date Filed: 07/27/2004 Entry ID: 1792492 
-5-

to resolve those disputes–but only those disputes–that the parties have agreed to

submit to arbitration.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943

(1995).

As with any contract dispute, we first look to the express terms, which require

Pro Tech and URS to arbitrate “[a]ll claims, disputes and other matters in question

between the parties to this agreement arising out of, or relating to” the contract. The

Agreement sets forth specific procedures governing the initiation of arbitration, and

the manner in which it is conducted, and provides that the resulting decision “shall

be final.” These express terms unambiguously reflect the parties’ intent both to

arbitrate disputes arising from the Agreement and to be bound by the arbitration

decisions resolving such disputes. It is against this backdrop that we turn to the

governing provisions of the Federal Arbitration Act (FAA).

A. Federal Arbitration Act

Because the Agreement is “a contract evidencing a transaction involving

commerce,” it is subject to the FAA. 9 U.S.C. § 2. The FAA provides that any

arbitration agreement within its scope “shall be valid, irrevocable, and enforceable.”

Id. The FAA permits “[a] party aggrieved by the alleged . . . refusal of another to

arbitrate” to petition any federal district court for an order compelling arbitration. Id.

§ 4. By its terms, the FAA “leaves no place for the exercise of discretion by a district

court, but instead mandates that district courts shall direct the parties to proceed to

arbitration on issues as to which an arbitration agreement has been signed.” Dean

Witter, 470 U.S. at 218. A court’s role under the FAA is therefore limited to

determining (1) whether a valid agreement to arbitrate exists and, if it does, (2)

whether the agreement encompasses the dispute. Gannon v. Circuit City Stores, Inc.,

262 F.3d 677, 680 (8th Cir. 2001). The parties do not dispute Pro Tech’s claims fall

within the scope of the arbitration provision. If the response is also affirmative on the

other question, then the FAA requires the court to enforce the arbitration provision

in accordance with its terms.

Appellate Case: 03-3329 Page: 5 Date Filed: 07/27/2004 Entry ID: 1792492 
-6-

B. Waiver and Timely Demand

“[W]hether the parties have submitted a particular dispute to arbitration, i.e.,

the ‘question of arbitrability,’ is ‘an issue for judicial determination [u]nless the

parties clearly and unmistakably provide otherwise.’” Howsam v. Dean Witter

Reynolds, Inc., 537 U.S. 79, 83 (2002) (quoting AT&T Tech., Inc. v.

Communications Workers of Am., 475 U.S. 643, 649 (1986)) (second alteration in

original); see First Options, 514 U.S. at 944. We must decide whether Pro Tech’s

allegations of waiver and insufficient and untimely demand, are questions of

arbitrability.

“[T]he presumption is that the arbitrator should decide ‘allegation[s] of waiver,

delay, or a like defense to arbitrability.’” Howsam, 537 U.S. at 84 (quoting Moses

H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)) (second

alteration in original). Indeed, “in the absence of an agreement to the contrary, issues

of substantive arbitrability . . . are for a court to decide and issues of procedural

arbitrability, i.e., whether prerequisites such as time limits, notice, laches, estoppel,

and other conditions precedent to an obligation to arbitrate have been met, are for the

arbitrators to decide.” Howsam, 537 U.S. at 85 (citations omitted).

Following this precedent, we conclude questions of whether waiver occurred

and whether demand was sufficient and timely under the agreement, involve issues

of procedural arbitrability, matters presumptively for the arbitrator, not for the judge.

See Int’l. Ass’n of Bridge, Structural, Ornamental, & Reinforcing Ironworkers, Local

493 v. EFCO Corp. & Constr. Prods., Inc., 359 F.3d 954, 957 (8th Cir. 2004) (noting

“the question of whether the procedural prerequisites have been complied with or . . .

waived . . . is a matter for the arbitrator and not for the court”); Dominium Austin

Partners, LLC v. Emerson, 248 F.3d 720, 728 (8th Cir. 2001) (ruling issue of waiver

of arbitration because of untimely demand is for arbitration); Contracting Northwest,

Inc. v. City of Fredricksburg, 713 F.2d 382, 386 (8th Cir. 1983) (ruling the court

would not entertain an objection that opposing party failed to deliver an arbitration

Appellate Case: 03-3329 Page: 6 Date Filed: 07/27/2004 Entry ID: 1792492 
-7-

demand within time limit); Auto., Petro. & Allied Indus. Employees Union, Local No.

618 v. Town & Country Ford, Inc., 709 F.2d 509, 514 (8th Cir. 1983) (stating “the

issue of whether the Union’s alleged failure to satisfy the notice requirement barred

arbitration is one of procedural arbitrability,” and “is reserved for the arbitrator, and

not the district court”).

Furthermore, arbitrators are the experts about the meaning of their own rules,

and are comparatively better able to interpret and to apply them than courts. In the

absence of any contrary statement in the arbitration provision, it is reasonable to infer

that the parties intended the provision to reflect that understanding. See Howsam,

537 U.S. at 85 (“for the law to assume an expectation that aligns (1) decisionmaker

with (2) comparative expertise will help better to secure a fair and expeditious

resolution of the underlying controversy–a goal of arbitration systems and judicial

systems alike”).

Accordingly, we conclude Pro Tech’s allegations of waiver and insufficient

demand fall within the class of gateway procedural disputes that do not present

“questions of arbitrability” this court should decide.

C. Unconscionability

Having decided the above gateway arbitrability issues against Pro Tech, we

turn to Pro Tech’s next contention, that the arbitration provision should not be

enforced because Pro Tech cannot now afford the costs of arbitration, thereby

rendering the provision unconscionable. Generally, when deciding whether an

arbitration provision is unconscionable, courts apply ordinary state-law principles

governing the formation of contracts. First Options, 514 U.S. at 944; see 9 U.S.C. §

2 (agreements are valid unless grounds “exist at law or in equity for the revocation

of any contract”). The parties do not dispute that Texas law governs, pointing to the

Agreement’s choice-of-law provision. Accordingly, we look to Texas state law to

determine whether the arbitration provision here is unconscionable. See Volt Info.

Appellate Case: 03-3329 Page: 7 Date Filed: 07/27/2004 Entry ID: 1792492 
-8-

Sci., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 477

(1989).

Under Texas law, the doctrine of unconscionability can be applied to

arbitration provisions in the same manner as it applies to other contracts. See In re

FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001). A reviewing court must

independently evaluate the law and address the unconscionability issue “on a

case-by-case basis, looking to the entire atmosphere in which the agreement was

made.” Pearce v. Pearce, 824 S.W.2d 195, 199 (Tex. Ct. App. 1991); see Dobbins,

198 F.3d at 717. “[T]he basic test for unconscionability is whether, given the parties’

general commercial background and the commercial needs of the particular trade or

case, the clause involved is so one-sided that it is unconscionable under the

circumstances existing when the parties made the contract.” FirstMerit, 52 S.W.3d

at 757. The purpose of the unconscionability doctrine is not to disturb the allocation

of risks because of superior bargaining power, but to prevent oppression and unfair

surprise. Id. Although the term “unconscionable” generally “describes a contract

that is unfair because of its overall one-sidedness or the gross one-sidedness of its

terms,” Texas “courts will not protect ‘a party who knowingly enters a lawful but

improvident contract.’” In re Marriage of Smith, 115 S.W.3d 126, 135 (Tex. Ct. App.

2003) (citation omitted). “[T]he fact that a bargain is a hard one does not entitle a

party to be relieved therefrom if [the party] assumed it fairly and voluntarily.” Id.

(citation omitted). And the party seeking to avoid the arbitration provision has the

burden of proving an arbitration provision is unconscionable. AutoNation USA Corp.

v. Leroy, 105 S.W.3d 190, 198 (Tex. Ct. App. 2003). 

Pro Tech simply cannot carry this burden. Pro Tech claims the arbitration

provision is unconscionable solely because it allegedly cannot afford to pay the fees

invoiced by the AAA. The arbitration provision forcing Pro Tech to arbitrate

potential disputes is not harsh or one-sided. The arbitration provision does not limit

either party’s participation in choosing arbitrators, and provides for application of the

Appellate Case: 03-3329 Page: 8 Date Filed: 07/27/2004 Entry ID: 1792492 
-9-

AAA rules. The arbitration provision does not give URS any greater rights than Pro

Tech, and does not limit Pro Tech’s ability to recover in arbitration. Furthermore, Pro

Tech and URS were both businesses holding themselves out as sophisticated enough

to negotiate a $471,071 government construction contract. Considering the parties’

commercial backgrounds and the Agreement’s terms, the arbitration provision was

not unconscionable at the time the parties made the contract. Applying Texas law,

we conclude the district court did not err in determining the arbitration provision was

not unconscionable.

Pro Tech also contends the prohibitive costs of arbitration present a hardship

and are unconscionable, rendering the arbitration provision unenforceable under

Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000). We disagree. In

Green Tree, the Supreme Court addressed arbitration of federal statutory claims, and

did not analyze the unconscionability of an arbitration agreement under state law. Id.

at 90-92. Under Texas law, we only consider the circumstances at contract formation

to determine if a contract is unconscionable, rendering Pro Tech’s current inability

to afford the costs of arbitration irrelevant to the conscionability determination.

After arbitration, Pro Tech may seek limited judicial review. See 9 U.S.C.

§ 10; First Options, 514 U.S. at 942. 

III. CONCLUSION

Accordingly, we affirm the district court’s judgment dismissing the

proceedings and compelling arbitration.

______________________________

Appellate Case: 03-3329 Page: 9 Date Filed: 07/27/2004 Entry ID: 1792492