Case Summary: Advanced Bodycare Solutions, LLC v. Thione International, Inc., 2008 U.S. App. LEXIS 8584

Issue: The United States Court of Appeals for the Eleventh Circuit addressed the issue of whether the Federal Arbitration Act (FAA) permits enforcement of a contract clause requiring an aggrieved party to institute mediation or non-binding arbitration prior to filing a lawsuit.

Rule: The Court held that since the mediation process does not purport to adjudicate or resolve a case in any way, it is not "arbitration" within the FAA and therefore, FAA remedies are not appropriately invoked to compel mediation. Thus, the FAA did not mandate enforcement of a clause requiring an aggrieved party to institute mediation or non-binding arbitration prior to filing a lawsuit. [1]

Facts: Advanced Bodycare Solutions and Thione International were parties to a licensing agreement, which granted Advanced Bodycare exclusive rights to market and distribute Thione's nutritional supplements and a related testing kit which purports to monitor the amount of free radical cells in the body. Advanced Bodycare ordered and paid for a certain quantity of the testing kits, which were delivered in September 2004, and subsequently discovered that many of the testing kits were defective. Advanced Bodycare raised the issue with Thione, which acknowledged the defect and shipped some replacement units in October 2005, but not enough to replace all of the defective kits. Because of this, Advanced Bodycare claimed Thione was in breach of the contract. [2]

The contract between the parties contained a provision specifying the procedures to be followed in the event of a dispute. At issue here is the requirement that if the parties fail to negotiate a resolution of the dispute, the dispute be submitted to either non-binding arbitration or mediation. [3]

Advanced Bodycare filed suit in Florida state court, alleging breach of contract and related state-law claims based on the defective test kits. The case was removed to federal court, and Thione moved to stay the suit pending arbitration pursuant to §3 of the FAA. The motion was denied, and Thione appealed the decision, which is the subject of the case at bar. [4]

Discussion: On appeal, the Court of Appeals for the Eleventh Circuit had to decide if a contract under which disputes "shall be submitted to non-binding arbitration or mediation" is an agreement "to settle by arbitration a controversy," making the dispute "referable to arbitration." If so, the district court erred in denying a stay, because when a dispute is arbitrable, entry of a §3 stay is mandatory. [5]

The Court begins by noting that if either mediation or non-binding arbitration is not FAA "arbitration," the agreement is not enforceable under the FAA, since if an aggrieved party has an unconditional right to choose between two or more dispute resolution procedures and one of them is not FAA arbitration, the contract is not one "to settle by arbitration a controversy," removing it from the scope of the FAA. [6]

The FAA does not define the term "arbitration." The Court reviews tests used by other circuits in determining arbitrability of disputes, and concludes that in determining whether any particular dispute resolution method is FAA arbitration, the "classic incidents" of "classic arbitration" shall be looked to. [7] These include (i) an independent adjudicator, (ii) who applies substantive legal standards, (iii) considers evidence and argument from each party, and (iv) renders a decision that purports to resolve the rights and duties of the parties, typically by awarding damages or equitable relief. [8] The Court indicates that the "award" element is controlling, stating that "If a dispute resolution procedure does not produce some type of award that can be meaningfully confirmed, modified, or vacated by a court upon proper motion, it is not arbitration within the scope of the FAA." [9]

Under this test, mediation is not included within the scope of the FAA, since it is a non-binding method of dispute resolution which does not resolve a dispute, but assists the parties in doing so. [10] Since mediation does not purport to adjudicate or resolve a case, it is not "arbitration" under the FAA and FAA remedies, including mandatory stays, are not appropriately invoked to compel mediation. Furthermore, a dispute resolution clause that can be satisfied by mediation or non-binding arbitration, at the aggrieved party's option, is also not enforceable under the FAA. [11] Since it held that mediation is not "arbitration" under the FAA, the Court did not reach the issue of whether non-binding arbitration is within the scope of the FAA. [12]

[1] Advanced Bodycare Solutions, LLC v. Thione International Inc., 2008 U.S. App. LEXIS 8584, at *1.

[2] Id. at *1-*2.

[3] Id. at *2.

[4] Id. at *4.

[5] Id.at *6.

[6] Advanced Bodycare, supra note 1 at *6-*7.

[7] Id. at *9.

[8] Id.

[9] Id. at *10.

[10] See id. at *11-*12.

[11] Advanced Bodycare, supra note 1 at *13.

[12] Id.