The 1st Circuit ruled that when the parties’ agreement incorporates by reference arbitration rules that authorize arbitrators to decide the enforceability of the agreement to arbitrate, the contract clearly and unmistakably reflects their intent to have the enforceability issue decided in arbitration. However, the court also held that, because the plaintiffs based their enforceability challenge on the costs of arbitration, a court should first determine if the arbitration agreement is illusory before referral to arbitration.
This was a purported class action alleging fraud, breach of contract and other claims against a franchisor. The franchisor asked the district court to compel arbitration of the claims of three franchisees because their franchise agreements contained an arbitration clause. One clause stated that the parties agree to arbitrate challenges to the enforceability of the franchise agreement, while all three stated that, unless otherwise provided or the parties agreed otherwise, arbitration would be conducted under the rules of the American Arbitration Association (AAA). The AAA rules state that arbitrators are authorized to rule on their own jurisdiction, including objections to the existence, scope or validity of the agreement to arbitrate.