Huron Consulting Group Inc. et al v. Gruner

Filing 19

MEMORANDUM Opinion and Order: Signed by the Honorable Rebecca R. Pallmeyer on 1/24/2018. Mailed notice. (etv, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
HURON CONSULTING GROUP INC. and,
CONSILIO LLC,
Plaintiffs,
v.
RONALD GRUNER, individually,
Defendant.

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No. 17 C 6042

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER
This is a dispute about the scope of an arbitration agreement. Defendant Ronald Gruner
filed a demand for arbitration of two claims against Plaintiffs Huron Consulting Group, Inc. and
Consilio, LLC. Plaintiffs contend that they agreed to arbitrate one of these claims, but not the
other, and have brought this action seeking declaratory relief and an order staying arbitration of
the claim they allege to be beyond the scope of their agreement with Defendant. Gruner has
moved to dismiss for improper venue or, in the alternative, for lack of subject matter jurisdiction,
arguing that the parties intended for the arbitrator, rather than a court, to decide whether certain
claims are arbitrable under the agreement. Because Gruner has not presented the requisite
clear and unmistakable evidence of this purported intent, the motion is denied.

Moreover,

because the court concludes as a matter of law that the parties did not agree to arbitrate the
claim in Gruner’s second count, the court directs him to show cause within 21 days why the
court should not stay arbitration of that claim.
BACKGROUND
Defendant Ronald Gruner, a resident of Naples, Florida, is the former CEO of Sky
Analytics, Inc., a legal analytics and technology company. (Not. of Removal [1], at ¶ 4; Compl.
[1-1], at ¶ 1.) Plaintiff Huron Consulting Group acquired Sky on December 30, 2014. (Compl.

¶ 7.) A year later, Huron sold a portion of its business—including Sky—to Plaintiff Consilio. (Id.
at ¶ 11.) The court is uncertain that Huron is a proper party to this lawsuit at all, as Gruner
suggests that Consilio stepped into its position with regard to the agreements relevant to this
case.

Nevertheless, Gruner has not contested Huron’s standing.

Huron is a Delaware

corporation with its principal place of business in Chicago, Illinois. (Not. of Removal ¶ 4.)
Plaintiff Consilio is a Virginia limited liability company with its principal office in Washington, DC,
whose sole member is Consilio, Inc., a Delaware corporation with its principal place of business
in Delaware. (Id. at ¶¶ 5-6; Gruner’s Response Regarding Diversity [17].)
The terms of Huron’s purchase of Sky were documented in a Stock Purchase
Agreement (SPA) dated December 30, 2014.

(Compl. ¶ 8.)

Huron agreed to pay Sky’s

shareholders a base purchase price of $9,000,000, plus two additional “earnout” payments in
the event that Sky generated revenues in excess of a designated amount. (Stock Purchase
Agreement [hereafter “SPA”], at §§ 1.2, 1.6, Ex. 1 to Compl.)

Section 1.6 of the SPA

established the method for calculating these earnout payments and procedures for resolving
certain disputes between the parties.

Subsection 1.6(c), titled “Disputes Regarding Net

Revenue; Earnout Amounts,” states, in relevant part, that disputes concerning the “earnout”
calculation will be resolved by an Independent Auditor:
Following receipt of any Earnout Report, the Representative [of Sky’s
stockholders] will be afforded a period of thirty (30) days to review such Earnout
Report and related calculation of the applicable Earnout Amount (the “Earnout
Review Period”). The Representative shall be deemed to have accepted the
Earnout Report and [Huron’s] calculation of the applicable Earnout Amount
unless, prior to the expiration of the Earnout Review Period, the Representative
shall deliver to [Huron] written notice and a detailed written explanation of those
items that are in dispute. . . . Within a further period of thirty (30) days from the
end of the Earnout Review Period, the parties will attempt to resolve in good faith
any disputed items. Failing such resolution, the unresolved disputed items will
be referred for final binding resolution to the Independent Auditor.
(SPA § 1.6(c).) Another section of the agreement, titled “Jurisdiction: Waiver of Jury Trial,”
states that the parties
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irrevocably submit to the exclusive jurisdiction of the United States District Court
for the Northern District of Illinois (or, if subject matter jurisdiction in that court is
not available, in the state courts of Illinois located in Cook County, Illinois) over
any dispute arising out of or relating to this Agreement, any Ancillary Agreement
or any agreement or instrument contemplated hereby or thereby or entered into
in connection herewith or therewith or any of the transactions contemplated
hereby or thereby.
(Id. at § 12.9.)
On January 6, 2015, Huron entered into a separate “Master Subcontractor Agreement”
(MSA) with Gruner. This agreement outlined terms under which Gruner would provide Huron
with “Product Vision, Strategy, and Development,” “Marketing and Sales Support,”
“Organizational Development,” and “Performance Optimization.”

(MSA Statement of Work,

Ex. 2 to Compl.) Unlike the SPA, the MSA did not include an arbitration clause. (Id.) It did,
however, include a choice-of-law provision stating that Illinois law would govern the rights and
duties of the parties, and a forum-selection clause stating that “jurisdiction over any dispute
arising in connection with this Agreement will be vested exclusively in the State or, if
appropriate, federal courts located in Cook County.” (MSA ¶ 16.)
The First Earnout Measurement Period began on April 1, 2015, and ended on March 31,
2016. (SPA § 11.1.) On December 31, 2015, Huron sold the legal portion of its business,
including Sky, to Consilio, Inc., the parent corporation of Plaintiff Consilio, LLC. (Compl. ¶ 11.)
On September 19, 2016, Plaintiff Consilio informed Sky’s stockholders, including Gruner, that
Sky had not produced sufficient revenue during the First Earnout Measurement Period to trigger
an earnout payment. (Compl. ¶ 12; Letter of Oct. 14, 2016, Ex. 3 to Compl.) Gruner responded
with a letter to Consilio and Huron, dated October 14, 2016, in which he identified himself as the
“Representative” of Sky’s stockholders. (Letter of Oct. 14, 2016, Ex. 3 to Compl.) In this letter,
Gruner blamed Huron and Consilio for Sky’s “inability to exceed the First Net Revenue
Threshold” and suggested that the companies had failed “to fulfill their respective contractual
obligations under the Purchase Agreement and to meet their implied covenant of good faith and
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fair dealing.” (Id.) Gruner’s MSA and “Statement of Work,” Gruner explained, had “amplified
the mutual expectations and responsibilities of the parties aimed at driving to successful
achievement of the Net Revenue targets.” (Id.) Huron and Consilio’s “fail[ure] to meet those
expectations . . . despite repeated attempts on [Gruner’s] part, shut the door on the strategic
and logistical initiatives required – and expressly defined in the SOW [Statement of Work] – to
enable Sky to achieve the Earnout targets.” (Id.) Gruner attached to the letter an invoice for
“consulting services” for which Huron allegedly owed him $120,000. (Id.)
According to the Complaint, the parties tried and failed to resolve the various issues
identified in this letter on their own. (Compl. ¶ 14.) On January 31, 2017, James D. Dasso,
identifying himself as an attorney for both “Sky Analytics, Inc. and the stockholders of Sky
Analytics, Inc.,” informed Huron and Consilio that his clients would be “referring the unresolved
disputed items to an Independent Auditor” pursuant to Section 1.6(c) of the SPA. (Letter of
Jan. 31, 2017, Ex. 4 to Compl.) The letter proposed that Deloitte serve as Independent Auditor.
(Id.) Unlike Gruner’s October 14 letter, Dasso’s January 31 letter made no mention of Gruner’s
subcontractor agreement or the invoice Gruner had attached to the October 14 letter. (Id.)
The parties eventually agreed to bring certain disputed issues to JAMS, a private
mediation and arbitration service, rather than an “Independent Auditor” as provided in the SPA.
(Compl. ¶ 16.) On March 20, 2017, Dasso—this time identifying himself as the representative of
“the former shareholders of Sky Analytics, Inc.”—sent e-mails memorializing this new
agreement to Huron’s general counsel Diane Ratekin and Consilio’s general counsel Mike
Flanagan. (E-mail thread of March 20, 2017, Ex. 6 to Compl.) These e-mails proposed that the
parties agree “to have all disputes regarding Net Revenue and the Earnout Amounts (as those
terms are used in Section 1.6 of the Purchase Agreement) proceed before JAMS, rather than
before an Independent Auditor as provided in the Purchase Agreement.” (Id.) The e-mails also
explained that “[u]nder JAMS Rule 5(a)(iii), a written confirmation of an agreement of all parties
to participate in arbitration by JAMS is sufficient to trigger its jurisdiction,” and stated that “[o]nce
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we get written confirmation from Huron and Consilio, we will submit our claims to JAMS to begin
the process.” (Id.) Later on March 20, Ratekin responded that “I understand this approach is
fine with Consilio, and so Huron is also fine with it.” (Id.) Flanagan responded “[c]onfirmed,”
also on March 20. (Id.)
Gruner filed a Demand for Arbitration with JAMS on April 7, 2017, ostensibly as the
“Representative” of Sky’s “former shareholders.” (JAMS Form 2, Ex. 6 to Compl.) Sky itself was
not named as a party in this document (nor is Sky named as a party to this suit). Gruner’s
Demand for Arbitration included two counts. The first alleged that Huron and Consilio breached
their implied duty of good faith and fair dealing under the SPA by, inter alia, “[f]ailing to maintain
key, pre-existing leadership,” “[f]ailing to support Sky after acquisition,” and “[f]ailing to retain
Gruner as a subcontractor.” (Demand for Arbitration ¶¶ 25-29.) The second count alleged that
Huron and Consilio breached the MSA by “[f]ailing to retain Gruner as a subcontractor,” “[f]ailing
to provide written notice of termination,” and “[f]ailing to pay Gruner fees for subcontractor
services he provided.” (Id. at ¶¶ 30-34.) The Demand for Arbitration identified the arbitration
clause in Section 1.6(c) of the SPA, the January 31, 2017 notice of referral, and the agreement
in the March 20, 2017 e-mails as the basis for JAMS’ jurisdiction. (Id. at ¶¶ 7-9.)
On June 8, 2017, JAMS Arbitrator Stephen A. Schiller issued a scheduling order in the
parties’ case. (Scheduling Order #1, Ex. 1 to Def.’s Reply in Supp. of Mot. to Dismiss [hereafter
“Def’s Reply”) [15].) This order stated, among other things, that “[p]ursuant to the agreement of
the parties, this Arbitration will be conducted under JAMS Comprehensive Rules.” (Id.) The
letter also explained that its purpose was “to memorialize certain agreements reached by the
parties and rulings made by the Arbitrator at a ‘Preliminary conference’ pursuant to JAMS
Comprehensive Rules (Rule 16) and conducted by way of teleconference on June 8, 2017.”
(Id.)
Huron and Consilio filed a Complaint in the Circuit Court of Cook County on June 23,
2017, naming Gruner in his individual capacity as Defendant and seeking a declaration that the
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claim in the second count of the Demand for Arbitration is “outside the scope of the parties’
agreement to arbitrate.” (Compl. ¶ 1.) Plaintiffs also sought an order staying the arbitration as
to the second count pursuant to 710 ILCS 5/2(b). (Id.) Gruner removed the case to this court
on August 18, 2017, and now moves to dismiss under Rules 12(b)(1) and 12(b)(3) of the
Federal Rules of Civil Procedure. (Mot. to Dismiss [10].)
DISCUSSION
I.

Procedural Posture
The dispute between Gruner and Huron/Consilio raises two distinct questions: (1)

whether the parties agreed to arbitrate claims alleging breach of the MSA; and (2) whether this
question of arbitrability must itself be decided by the arbitrator. Gruner’s Motion asks the court
to resolve only this second question. (See Mot. to Dismiss 1; Def.’s Reply 7.) His briefs,
however, contain arguments in support of his position on the first question, as well. Plaintiffs
suggest that he should have moved to compel arbitration under Section 4 of the Federal
Arbitration Act, 9 U.S.C. § 4, rather than moving to dismiss under Rule 12(b), though they
request that the court address Gruner’s substantive arguments “regardless of how it treats the
Motion.” (Pls.’ Resp. to Mot. to Dismiss (hereafter “Pls.’ Resp.”) [12], at 6 n.3.)
As an initial matter, the court notes that it would be improper to dismiss this case for lack
of subject-matter jurisdiction under Rule 12(b)(1). See Johnson v. Orkin, LLC, 556 F. App’x
543, 544 (7th Cir. 2014) (“An arbitration agreement . . . can be waived by the parties, so the
effect of such an agreement on a lawsuit is not jurisdictional.”); Williams-Bell v. Perry Johnson
Registrars, Inc., No 14-cv-1002, 2015 WL 6741819, at *2-3 (N.D. Ill. Jan. 8, 2015) (Gottschall,
J.) (“Johnson teaches that when faced with a forum selection clause . . . that requires the parties
to arbitrate their disputes before the AAA, a court should not dismiss for lack of subject matter
jurisdiction pursuant to Rule 12(b)(1).”).
The decision Defendant cites in support of his Rule 12(b)(3) motion to dismiss for
improper venue, meanwhile, states that dismissal under Rule 12(b)(3) is proper “when the
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arbitration clause requires arbitration outside the confines of the district court’s district.”
Faulkenberg v. CB Tax Franchise Systems, LP, 637 F.3d 801, 808 (7th Cir. 2011); see also
Continental Casualty Co. v. American Nat. Ins. Co., 417 F.3d 727, 733 (7th Cir. 2005). That is
not the case here, where the applicable arbitration clauses do not specify any location (and
where the agreements’ additional forum-selection clauses specify this district as a proper venue
for litigation outside the scope of the arbitration clauses). (See SPA §§ 1.6, 12.9; MSA ¶ 16; Emails of March 20, 2017.)
For these reasons, and because Gruner has presented arguments in his briefs that go to
the underlying question of whether the second claim in his Demand for Arbitration is arbitrable,
the court will treat the motion as one to compel arbitration under the Federal Arbitration Act. Cf.
Continental Casualty Co., 417 F.3d at 732 n.7. The court considers the two questions raised by
Gruner’s motion—that is, whether the parties agreed to arbitrate claims alleging breach of the
MSA, and whether this question of arbitrability must itself be decided by the arbitrator—in
reverse order, as a decision in Gruner’s favor on the second question would obviate the need to
decide the first.
II.

The parties did not agree to arbitrate the question of arbitrability.
Gruner believes that an arbitrator, rather than this court, must decide whether the

second claim in his Demand for Arbitration is arbitrable. He first argues that the “strong federal
policy in favor of arbitration” requires this court to presume that the parties agreed to arbitrate
this question of arbitrability. (Mot. to Dismiss 3.) Gruner is correct that the Federal Arbitration
Act establishes a “liberal federal policy favoring arbitration.” AT&T Mobility, LLC v. Concepcion,
563 U.S. 333, 339 (2011) (quoting Moses H. Cone Memorial Hosp. v. Mercury Const. Corp.,
460 U.S. 1, 24 (1983)). “As a general policy matter, federal courts favor arbitration.” Wisconsin
Local Gov’t Property Ins. Fund v. Lexington Ins. Co., 840 F.3d 411, 415 (7th Cir. 2016). But
Gruner is incorrect that this liberal federal policy creates a legal presumption that, where parties

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agree to arbitrate some disputes but not others, they intend to have the arbitrator decide in the
first instance which disputes are arbitrable and which are not.
In fact, the law requires the opposite presumption. A long line of U.S. Supreme Court
decisions holds that “[c]ourts should not assume that the parties [to a contract] agreed to
arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so.” First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (quoting AT&T Technologies,
Inc. v. Commn’cns Workers, 475 U.S. 643, 649 (1986)). This heightened evidentiary
requirement is “an important qualification” to the default rule that courts should interpret
arbitration clauses according to “ordinary state-law principles that govern the formation of
contracts.” Id. It rests on the premise that a contracting party could reasonably overlook the
“rather arcane” question of whether an arbitrator or a court should decide questions of
arbitrability. Id. at 945. The Supreme Court has repeatedly held that this and other “gateway”
matters are presumptively “for the court” to decide. Howsam v. Dean Witter Reynolds, Inc., 537
U.S. 79, 84 (2002). Even in cases where the Court has narrowed the definition of a gateway
matter, it has reiterated that courts must apply a “heightened standard” when considering the
parties’ “manifestations of intent” to “arbitrate arbitrability.”

Rent-A-Center, West, Inc. v.

Jackson, 561 U.S. 63, 69 n.1 (2010); see also BG Group, PLC v. Republic of Argentina, 134 S.
Ct. 1198, 1206-07 (2014) (dispute over the timing of arbitration was “purely procedural” and thus
not the type of “dispute[] about ‘arbitrability’” to which presumption in favor of judicial
determination would attach).

As the Seventh Circuit recently reaffirmed, “[c]ourts, not

arbitrators, are charged with deciding ‘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.’” Wisconsin Local Gov’t Property Ins. Fund v. Lexington Ins. Co.,
840 F.3d 411, 414-15 (7th Cir. 2016) (quoting Green Tree Financial Corp. v. Bazzle, 539 U.S.
444, 453 (2003)).

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Few, if any, of Defendant’s cases support his contention that this longstanding
interpretive rule has been replaced by its opposite—that is, by a presumption that “disputes
about ‘arbitrability’” should be decided by arbitrators in the absence of clear evidence to the
contrary. Gruner first points to the Seventh Circuit’s decision in International Brotherhood of
Electrical Workers, Local 21 v. Illinois Bell Telephone Co., which states that “[w]hen resolving
arbitrability disputes, a court must bear in mind the liberal federal policy in favor of arbitration
agreements.” 491 F.3d 685, 687 (7th Cir. 2007). But this statement does not mean what
Gruner suggests it does—i.e., that the “liberal federal policy in favor of arbitration agreements”
requires the court to presume that parties intend to have arbitrators decide disputes about the
scope of arbitration agreements. Rather, it means that a court must apply a presumption of
arbitrability when the court itself decides whether the parties agreed to arbitrate a particular
claim. The sentence immediately preceding the one Gruner quotes confirms this: “[u]nless the
parties clearly provide otherwise, the question of arbitrability is properly decided by a court, not
the arbitrator.” Id.
Gruner makes the same mistake with regard to AT&T Mobility, LLC v. Concepcion, 563
U.S. 333 (2011), Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983),
Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016), Gore v. Alltel Commc’ns, LLC, 666
F.3d 1027 (7th Cir. 2012), Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907 (7th Cir.
1999), and Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int’l, Ltd., 1 F.3d 639 (7th Cir.
1993). Each of these cases recognizes, in one phrasing or another, a “general policy ‘favoring
arbitration and a liberal federal policy favoring arbitration agreements,’” Lewis, 823 F.3d at 1159
(quoting AT&T Mobility, 563 U.S. at 346). Some also state that “broad” or “expansive” arbitration
clauses “necessarily create a presumption of arbitrability,” and that “any doubts concerning the
scope of arbitrable issues should be resolved in favor of arbitration.” Kiefer, 174 F.3d at 909
(quoting Moses H. Cone, 460 U.S. at 24-25); Gore, 666 F.3d at 1034 (same); Sweet Dreams,
1 F.3d at 642 (same).
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None of these cases, however, involved a dispute about the “gateway” question of
whether an arbitrator or a court should decide whether the parties agreed to arbitrate a
particular claim.

As a result, none challenge the well-established rule that a “reverse[]”

presumption applies to the question of who should decide whether a particular claim is
arbitrable. First Options, 514 U.S. at 945. As the Supreme Court recently reaffirmed, “courts
presume that the parties intend courts, not arbitrators, to decide what we have called disputes
about ‘arbitrability.’” BG Group, 134 S. Ct. at 1206; see also Wisconsin Local Gov’t, 840 F.3d at
414.
The only case Gruner cites that comes close to supporting his position on this issue is
Donaldson, Lufkin & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 530 N.E.2d 439 (1988). That
case involved an employment contract between defendant and his employer, a commodity
futures broker. It also involved the Rules of the Chicago Board of Trade (CBOT), of which both
parties were members. CBOT Rule 600.00 stated, in relevant part, that “[a]ny controversy
between parties who are members which arises out of the Exchange business of such parties
shall, at the request of any such party, be submitted to arbitration in accordance with regulations
prescribed by the Board.” Id. at 439. The dispute in Donaldson was whether the defendant’s
claims for compensation, severance pay and unpaid expenses “ar[o]se out of Exchange
business,” and thus fell within the scope of the arbitration provision in Rule 600.00, or whether
they arose from defendant’s employment contract alone.

Id. at 451.

But the parties also

disputed whether a court or an arbitrator should decide that question in the first place.
Reversing the Illinois Appellate Court, the Illinois Supreme Court explained that “when the
language of an arbitration clause is broad, and it is unclear whether the subject matter of the
dispute falls within the scope of [the] arbitration agreement, the question of substantive
arbitrability should initially be decided by the arbitrator.” Id. at 447-48. Put differently, the court
held that a court should presume that the arbitrator determines arbitrability in one specific

10

circumstance: where an arbitration clause is simultaneously “broad” and it is “unclear” as to
whether the dispute in question falls within the scope of that arbitration clause.
Notably, Donaldson is premised on an interpretation of the Illinois Uniform Arbitration
Act, not federal arbitration law. Id. at 449 (noting that the “most important[]” factor in the Court’s
decision was “the intent of the drafters of the Uniform Arbitration Act”). The Seventh Circuit has
advised that “federal arbitration law governs the arbitration provisions in any contract evidencing
a transaction in interstate commerce.” Northern Ill. Gas Co. v. Airco Indus. Gases, 676 F.3d
270, 274-75 (7th Cir. 1982); see also Zechman v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
742 F. Supp. 1359, 1367 n.6 (N.D. Ill. 1990) (noting that Donaldson “is predicated on the
applicability of the Illinois Uniform Arbitration Act,” which is “superseded by the Federal
Arbitration Act” in disputes involving transactions in interstate commerce).

Gruner’s case

involves a transaction in interstate commerce—the parties appear to have been residents of
different states at the time they entered into at least some of the agreements in question (cf.
Letter of Oct. 14 and Invoice, Ex. 3 to Compl. (identifying addresses of all parties as of October
2016))—so federal arbitration law applies here.
Even if Donaldson were applicable in this case, the court doubts that the parties’
arbitration agreement is sufficiently “broad” to trigger the state-law presumption in favor of
arbitrating arbitrability.

Unlike the arbitration clause in Donaldson, which referred to “[a]ny

controversy between parties who are members which arises out of the Exchange business of
such parties,” 530 N.E.2d at 439, the relevant arbitration clause here extends only to “disputes
regarding Net Revenue and the Earnout Amounts (as those terms are used in Section 1.6 of the
Purchase Agreement).”

(E-mail of March 20, 2017.)

The phrase “disputes regarding Net

Revenue and the Earnout Amounts (as those terms are used in Section 1.6 of the Purchase
Agreement)” describes a limited set of disputes. The phrase “controversy . . . which arises out
of the Exchange business of such parties,” on the other hand, reaches not only controversies
about any type of “Exchange business,” but also any controversies “arising out of” such
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Exchange business. Defendant here argues that the phrases “arising out of” and “regarding”
are equally “broad,” (Def.’s Reply 2-3), but even if this is true, it ignores the difference in breadth
between the phrases “Exchange business” and “Net Revenue and the Earnout Amounts (as
those terms are used in Section 1.6 of the Purchase Agreement).”
The question for this court to decide, therefore, is whether there is “clear and
unmistakable” evidence that the parties intended to arbitrate disputes about arbitrability. First
Options, 514 U.S. at 944; Rent-A-Center, 561 U.S. at 69 n.1. Gruner points to two matters
relevant to the parties’ intent: (1) the fact that the parties agreed in the March 20 email to
arbitrate before JAMS, and (2) the fact that JAMS’ own rules state that “[j]urisdictional and
abitrability disputes, including disputes over the formation, existence, validity or scope of the
agreement under which Arbitration is sought . . . shall be submitted and ruled on by the
Arbitrator.” (Mot. to Dismiss 5-7.) 1 Gruner argues that “[t]he JAMS rules are incorporated into
the agreement” between the parties. (Def.’s Reply 5.)
Several courts of appeal have held that the incorporation of an arbitrator’s rules into an
arbitration clause can provide the requisite clear and unmistakable evidence of contracting
parties’ intent to arbitrate arbitrability—at least in circumstances where the incorporated rules
state that the arbitrator will decide disputes about arbitrability. See, e.g., Brennan v. Opus
Bank, 796 F.3d 1125, 1130 (9th Cir. 2015); Petrofac, Inc. v. DynMcDermott Petroleum
Operations Co., 687 F.3d 671, 674-75 (5th Cir. 2012); T.Co Metals LLC v. Dempsey Pipe &
Supply, Inc., 592 F.3d 329, 344-45 (2d Cir. 2010); Fallo v. High-Tech Institute, 559 F.3d 874,
877-78 (8th Cir. 2009).

In each of these cases, however, the parties’ contract expressly

provided for arbitration according to the rules of the arbitrator. In Brennan, for example, the
parties agreed to “binding arbitration in accordance with the Rules of the American Arbitration

1

The court takes judicial notice of Rule 11(b) of the JAMS Comprehensive
Arbitration Rules & Procedures, Effective July 1, 2014. See FED. R. EVID. 201(b)(2). These
rules can be found at https://www.jamsadr.com/rules-comprehensive-arbitration/ (last visited
Jan. 8, 2017).
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Association.” 796 F.3d at 1128 (emphasis added). Similarly, in Dempsey the parties agreed to
arbitrate “under the [i]nternational arbitration rules of the American Arbitration Association.” 592
F.3d at 334. The same is true of the cases from this district cited by Gruner. See Info. Sys.
Audit & Control Ass’n, Inc. v. TeleCommunication Sys., Inc., No. 17-cv-2066, 2017 WL
2720433, at *2 (N.D. Ill. June 23, 2017) (agreement provided for arbitration “in accordance with
the Commercial Arbitration Rules of the American Arbitration Association”); Cequent
Performance Prods., Inc. v. Let’s Go Aero, Inc., No. 14-cv-8457, 2016 WL 4036754, at *6 (N.D.
Ill. July 28, 2016) (agreement provided for arbitration “administered by the American Arbitration
Association in accordance with the provisions of its Commercial Arbitration Rules”). 2
The March 20 e-mail, by contrast, does not say anything about incorporating JAMS
rules, let alone the specific rule relating to disputes about arbitrability and jurisdiction. Nor does
any other correspondence in the record mention the JAMS rules or discuss the question of who
should decide disputes over arbitrability. Although the JAMS Arbitrator apparently believed that
the parties incorporated the JAMS rules into their arbitration agreement—he wrote in a
scheduling order that “pursuant to the agreement of the parties this Arbitration will be conducted
under JAMS Comprehensive Rules” (Scheduling Order #1, Ex. 1 to Def.’s Reply)—the
Arbitrator’s conclusory statement is not the kind of clear and unmistakable evidence of the
parties’ intent that the law requires.
True, the March 20 e-mail does refer to one specific JAMS rule. It states that “[u]nder
JAMS Rule 5(a)(iii), a written confirmation of an agreement of all parties to participate in
arbitration administered by JAMS is sufficient to trigger its jurisdiction.” This reference to a
specific JAMS rule could be interpreted as a proposal to conduct the arbitration according to all
JAMS rules, including the rule that the arbitrator will decide disputes about arbitrability. When

2

Gruner also points to Wilson Sporting Goods Co. v. Head Sports, Inc., No. 94-cv4966, 1994 WL 702611 (N.D. Ill. Dec. 14, 1994), but this case, like most others he cites,
involved only a dispute about arbitrability. It did not raise the question of whether the dispute
about arbitrability was itself arbitrable, as the case now before the court does.
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read in context, however, the more appropriate interpretation of this statement is as no more
than an acknowledgement that the parties had agreed to arbitration by JAMS—not an implicit
proposal to voluntarily adopt all JAMS’ boilerplate rules. It seems highly unlikely that a fleeting
reference to the procedure for initiating arbitration led Plaintiffs to consider the “rather arcane”
question of whether disputes over the scope of the arbitration agreement should be decided by
the arbitrator or by a court. First Options, 514 U.S. at 944. The Supreme Court imposed a
“heightened standard” on claims of intent to “arbitrate arbitrability,” Rent-A-Center, 561 U.S. at
69 n.1, for precisely this reason.
Gruner contends that it would have been redundant for the parties to designate both the
forum for arbitration (i.e., JAMS) and the applicability of that forum’s rules. Where parties
designate a particular forum for arbitration, Gruner suggests, a court should infer that the parties
intended for all of that forum’s rules to apply. In support of this proposition, Gruner points to
Brown v. Delfre, 2012 Ill. App. (2d) 111086, 968 N.E.2d 696 (2d Dist. 2012), a case involving a
dispute over the enforceability of an arbitration clause in a contract between plaintiff, a former
professional football player and his investment advisor. The arbitration clause provided that the
parties would submit to binding arbitration “conducted by and according to the securities
arbitration rules . . . of the [National Association of Securities Dealers (NASD)].” Id. at 699.
NASD was succeeded by the Financial Industry Regulatory Authority (FINRA), which
subsequently informed the parties that it would not arbitrate disputes among non-members.
Plaintiff then challenged the enforceability of the arbitration agreement, arguing that the parties
had only agreed to arbitrate in the now-unavailable NASD/FINRA forum, and the trial court
agreed, refusing to compel arbitration. The appellate court disagreed; it noted that the parties’
contract required the parties to arbitrate in accordance with NASD/FINRA’s rules, but did not
require that they arbitrate in a NASD/FINRA forum.

The arbitration agreement remained

enforceable, the court held, explaining that “if the parties contemplated that NASD/FINRA would

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be the exclusive arbitral forum, there would be no need to specify that the arbitration must be
conducted by NASD/FINRA’s rules.” Id. at 703.
Whatever the merits of this reasoning, the Brown decision does not directly support
Gruner’s argument here: like nearly all the cases Gruner cites, Brown involved a dispute about
arbitrability, rather than a dispute about the parties’ intent (or lack thereof) to arbitrate
arbitrability. The court concluded that it was proper to infer from the designation of an arbitral
forum the parties’ intent to be governed by all that forum’s rules. But the court’s analysis was
not governed by the heightened evidentiary standard that applies to Gruner’s claim that he and
Plaintiffs agreed to arbitrate the issue of arbitrability. To prevail on this claim, Gruner needed to
present clear and unmistakable evidence of the parties’ intent to arbitrate arbitrability. The fact
that the parties designated an arbitral forum that offers parties the option of adopting a rule to
this effect is not enough.
III.

Gruner’s claim alleging breach of the MSA is not arbitrable.
The court is thus called upon to address the underlying question at the heart of this

case: whether the claim in Count II of Gruner’s Demand for Arbitration—that is, the claim
alleging breach of the MSA—is arbitrable. The “heightened standard” that applies to “gateway”
matters, Rent-A-Center, 561 U.S at 69 n.1, does not apply here. Indeed, the presumption in
favor of judicial determination is “reverse[d]” where the question is “whether a particular meritsrelated dispute is arbitrable because it is within the scope of a valid arbitration agreement.” First
Options, 514 U.S. at 944-45. In deciding this question, “any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration.” Gore v. Alltel Commc’ns, LLC, 666
F.3d 1027, 1032 (7th Cir. 2012) (quoting Moses H. Cone, 460 U.S. at 24-25). But this “general
preference” for arbitration still “yields to explicit contrary contractual language.” Wisconsin Local
Gov’t, 840 F.3d at 415. “[A]rbitration is a matter of contract and a party cannot be required to
submit to arbitration any dispute which he has not agreed so to submit.” Duthie v. Matria
Healthcare, Inc., 540 F.3d 533, 536 (7th Cir. 2008) (quoting Howsam, 537 U.S. at 83.)
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The arbitration clause Gruner relies on is located in the parties’ e-mail thread of March
20, 2017. It states, in relevant part, that the parties agree “to have all disputes regarding Net
Revenue and the Earnout Amounts (as those terms are used in Section 1.6 of the Purchase
Agreement) proceed before JAMS, rather than before an Independent Auditor as provided in the
Purchase Agreement.” (E-mail of March 20, 2017.) Neither the arbitration clause itself nor the
e-mail chain in which it was included refer to the MSA or to Gruner’s employment at any point.
Gruner suggests, however, that the term “regarding” in the arbitration clause is so “expansive”
that it “reaches all disputes having their origin or genesis in the contract, whether or not they
implicate interpretation or performance of the contract per se.” (Reply Br. 2 (quoting Davis v.
Fenton, 26 F. Supp. 3d 727, 740 (N.D. Ill. 2014) (Castillo, J.)).
The court has already noted its skepticism of this argument—at least as it applies to the
arbitration clause in this case. It is true, as Gruner points out, that state and federal courts in
Illinois have found the word “regarding,” when used in an arbitration clause, to be similarly
“broad” to language such as “arising from” or “related to.” See, e.g., Bass v. SMG, Inc., 328 Ill.
App. 3d 492, 498, 765 N.E.2d 1079, 1085 (1st Dist. 2002); Davis, 26 F. Supp. 3d at 740. But
Gruner ignores the importance of the object of the word “regarding.” The contract in Bass, for
example, bound the parties to arbitrate “any dispute, claim or controversy between the parties
regarding this Agreement.” 328 Ill. App. 3d at 495, 765 N.E.2d at 1083 (emphasis added). It
was “the Agreement” that a dispute needed to “regard” in order to be arbitrable under that
contract. Similarly, in Davis, the contract required the parties to arbitrate “a dispute between
ATTORNEY(S) and CLIENT regarding any provision in this agreement, or the outcome of the
matter for which CLIENT retained ATTORNEY(S).” 26 F. Supp. 3d at 734 (emphasis added).
The object of “regarding” in this contract was “any provision in this agreement, or the outcome of
the matter” for which the client retained the attorney.
In Gruner’s case, by contrast, the arbitration clause binds the parties to arbitrate “all
disputes regarding Net Revenue and the Earnout Amounts (as those terms are used in Section
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1.6 of the Purchase Agreement).” (E-mail thread of March 20, 2017 (emphasis added).) The
object of “regarding” here is much more specific than the object in either Davis or Bass. Only
those disputes that “regard” a single topic addressed in the Stock Purchase Agreement (i.e.,
“Net Revenue and the Earnout Amounts”) are covered by the arbitration clause, rather than any
dispute regarding any aspect of any agreement between the parties.
The Seventh Circuit has treated similar contractual language as a significant limitation
on the scope of an arbitration clause. In Welborn Clinic v. MedQuist, Inc., 301 F.3d 634 (7th
Cir. 2002), for example, the parties had agreed to arbitrate “any” dispute “with respect to any
invoice amount.” Id. at 636. The plaintiff sued defendant, its medical transcription vendor,
alleging that defendant had (1) defrauded plaintiff and breached the agreement by inflating the
amount of work for which plaintiff would be billed; (2) committed constructive fraud and violated
the Indiana Deceptive Consumer Sales Act by misrepresenting its counting and billing practices;
and (3) breached the parties’ agreement by failing to meet designated work deadlines. Id. at
636, 640. Defendant argued that the arbitration clause in the parties’ agreement required the
arbitration of all these claims, but the Seventh Circuit disagreed. “The arbitration clause here
does not provide for the resolution of all controversies and claims relating to the contract,” the
court explained.

Id. at 639.

“[I]ndeed, it does not even provide for the resolution of all

controversies and claims relating to or arising out of billing.” Id. The only claims that were
arbitrable under this clause were those alleging that defendant had improperly inflated its
invoices. The district court therefore erred in requiring arbitration of plaintiff’s other claims,
premised on defendant’s statements about its billing practices (rather than the bills themselves),
or on defendant’s alleged failure to meet deadlines. Id. at 640-41.
Similarly, in Bradford-Scott Data Corp. v. Physician Computer Network, the parties
entered into a Master License Agreement that authorized the plaintiff to redistribute the
defendant’s computer software and required arbitration of “any payment dispute concerning
license or support fees.” 136 F.3d 1156, 1157 (7th Cir. 1998). Plaintiff later alleged that the
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defendant breached the parties’ agreement by increasing plaintiff’s sales quota, by disclosing
plaintiff’s customer lists to unauthorized parties, by soliciting plaintiff’s customers, and by
“unreasonably withholding consent” to plaintiff’s assignment of its rights under the agreement to
a potential purchaser. Id. Affirming the district court, the Seventh Circuit concluded that none of
these claims were arbitrable under the Master License Agreement because none were
“payment dispute[s].” Id. at 1158.
Gruner does not even attempt to distinguish these cases in his Reply Brief, and he does
not seriously argue that his claim for breach of the MSA “regard[s]” Net Revenue and Earnout
Amounts.

He half-heartedly suggests that it does so because Consilio’s failure to employ

Gruner caused Sky not to meet its revenue targets. (Reply Br. 3) But this does not make
Gruner’s claim for breach of the MSA one whose “origin or genesis” lies in “Net Revenue and
Earnout Amounts.” Davis, 26 F. Supp. 3d at 740. Gruner could perhaps argue that the claim
for breach of the MSA has its origin or genesis in the SPA generally, as there would have been
no need for Gruner to enter into the subcontractor agreement with Huron if it had not purchased
Sky. But the parties did not agree to arbitrate all disputes regarding the SPA. They only agreed
to arbitrate disputes “regarding Net Revenue and the Earnout Amounts.”
Gruner next argues that his respective claims under the SPA and the MSA are so
“inextricably intertwined” that the arbitration clause in the March 20 e-mails necessarily extends
to both of them. (Reply Br. 4.) To support this argument, he points to the Seventh Circuit’s
decision in Gore v. Alltel, 666 F.3d 1027 (7th Cir. 2012), which concluded that an arbitration
clause in one contract between two parties extended to claims arising from another contract
between the parties that lacked an arbitration clause. But Gore is distinguishable from this
case. Gore was a dispute about cellular telephone service. Although the service agreement the
plaintiff customer had signed did not include an arbitration clause, a monthly invoice that the
provider later sent to the customer did.

The invoice warned that “by paying this bill” the

customer agreed to be bound by additional terms and conditions, including one that required the
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parties to arbitrate “any dispute arising out of this agreement or relating to the services and
equipment.” Id. at 1030-31. The court held that the customer’s claims for breach of the original
agreement, as well as his claims for fraud, civil conspiracy, and aiding and abetting, were all
subject to arbitration because the nature of the defendant’s allegedly unlawful conduct (i.e.,
providing and conspiring to provide inadequate cellular service) made the claims
“dispute[s] . . . relating to the services and equipment.” Id. at 1035-36. In short, the customer’s
claim for breach of the first agreement was arbitrable because its “factual allegations . . . [were]
inextricably linked to the services he received,” and the parties’ second agreement expressly
stated that disputes relating to those services were arbitrable. Id. at 1036.
Gruner’s claim for breach of the MSA, by contrast, is completely “extricable” from “Net
Revenue and the Earnout Amounts (as those terms are used in Section 1.6 of the Purchase
Agreement).” Under the MSA, Huron agreed to pay Gruner $10,000 per month for a period of
one year, in exchange for Gruner’s “satisfactory performance” of services such as “product
vision, strategy, and development,” and “marketing and sales support.” (Statement of Work 12.) Whether Huron and Gruner satisfied their respective obligations under this contract does not
depend on Sky’s net revenue or the amount of the earnout payments to which Sky’s
stockholders may or may not have been entitled.

Unlike in Gore, where the core factual

allegations supporting the plaintiff’s claims related to precisely the subject matter described in
the arbitration clause (that is, “services and equipment”), the core factual allegations here
regard Consilio’s failure to pay Gruner $10,000 per month in exchange for Gruner’s satisfactory
performance of the services outlined in the MSA. The arbitration clause says nothing about
disputes regarding Gruner’s employment. Gruner maintains that “Consilio’s failure to involve
Gruner in the business will help to prove that Consilio breached the Stock Purchase Agreement
by failing to operate the business in a manner that would maximize the earnout consideration.”
(Reply Br. 4.) But this suggests only that the factual allegations in the stockholders’ claim under
the SPA may overlap with the allegations in Gruner’s individual claim under the MSA, not that
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his claim under the MSA is “inextricably linked” to an arbitrable dispute regarding net revenue or
earnout payments. Whether any of the parties breached the MSA can be decided without any
evidence on the subject of net revenue or earnout payments.
The court’s conclusion on this issue is reinforced by a Seventh Circuit decision cited by
neither party. In Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657 (7th Cir. 2002), the parties
entered into two contracts: one providing for the sale of plaintiff’s business to defendant, and
another providing for plaintiff’s continued employment by the company. Both contracts were
signed on the same day, but only the employment contract included a clause directing that “any
matter in dispute under or relating to this agreement . . . be finally resolved by binding
arbitration.” Id. at 660. When defendant subsequently failed to make the payments called for
by the agreement to purchase the business, plaintiff sued, alleging breach of contract and fraud.
Reversing an order compelling arbitration, the Seventh Circuit held that the claims were not
arbitrable even though the parties signed the two contracts at the same time and even though
the agreements “were both necessary . . . components of a comprehensive business
transaction.” Id. at 663. The arbitration clause in the employment contract “covers all aspects
of [plaintiff]’s employment relationship,” the court explained, but it did not reach issues arising
out of the purchase agreement. Id. at 664.
Like the employment contract in Rosenblum, the March 20 agreement here provides no
indication of the parties’ intent to arbitrate claims for breach of the MSA. The fact that Gruner’s
claim for breach of the MSA may include similar factual allegations to his claim for breach of the
SPA does not mean that the arbitration clause in the March 20 agreement necessarily extends
to both. That clause extends only to what it says it does: “disputes regarding Net Revenue and
the Earnout Amounts (as those terms are used in Section 1.6 of the Purchase Agreement).” As
Gruner’s claim for breach of the MSA can be decided without any reference whatsoever to “Net
Revenue and the Earnout Amounts,” that claim is not arbitrable under the March 20 agreement.

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CONCLUSION
Defendant has not presented clear and unmistakable evidence of the parties’ intent to
arbitrate arbitrability, so his Motion [10] is denied. Because there is no evidence that the parties
intended to arbitrate claims for breach of the MSA, moreover, Defendant is given 21 days to
show cause why this court should not stay arbitration of the claim in the second count of his
Demand for Arbitration.
ENTER:

Dated: January 24, 2018

_________________________________________
REBECCA R. PALLMEYER
United States District Judge

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