Supreme Court Decision: Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates, LLC (Arbitrability)

In Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates (2018 WI 112), the Supreme Court held that circuit courts may decide whether a dispute should be arbitrated when an original contract contains a mandatory arbitration clause but a subsequent contract does not.

The parties in this case entered into an “Operating Agreement” contract with a noncompete restrictive covenant. The Operating Agreement contained a mandatory arbitration clause, incorporating by reference a rule that the arbitrator has jurisdiction to rule on arbitrability of disputes arising from the contract.

In the process of restructuring, Midwest and Great Lakes drafted a “Redemption Agreement” that contained a merger clause releasing Great Lakes from the terms of the Operating Agreement. Because Midwest did not officially sign the Redemption Agreement, the parties dispute whether it is enforceable.

The underlying litigation in this case involves whether Dr. Pannu violated a noncompete clause in the Operating Agreement by engaging in competitive practice after he signed the Redemption Agreement. The issue before the Supreme Court was whether the circuit court had authority to determine arbitrability despite the original Operating Agreement mandating arbitrability be determined by an arbitrator.

In a 5-1 ruling (Justice Ziegler, joined by Justices Walsh Bradley, Kelly, and Chief Justice Roggensack, with Justice Abrahamson concurring), the court determined that the circuit court can determine arbitrability when a subsequent contract does not contain an arbitration clause, even if the original contract mandated arbitration. The court stated that freedom of contract principles allow parties who have agreed to arbitrate to subsequently contract out of the arbitration agreement. The court also found that, if valid, the Redemption Agreement would supersede the Operating Agreement’s arbitration clause. However, because there were still issues of material fact as to whether both parties formally agreed to the Redemption Agreement, the Supreme Court remanded the case to circuit court to determine the validity of the Redemption Agreement.

In her concurring opinion, Justice Abrahamson suggested that, because the subject matter of the Redemption Agreement differed from the Operating Agreement, the Redemption Agreement did not entirely supersede all terms of the Operating Agreement. Abrahamson said circuit courts do have the authority to determine whether any part of a subsequent contract (here, the Redemption Agreement) supersede arbitration provisions in a previous contract.

In a dissent, Justice R. Bradley argued that the question of whether the Redemption Agreement supersedes the Operating Agreement is an issue of substantive arbitrability governed by the Operating Agreement. Therefore, an arbitrator – not the courts – should decide whether the Redemption Agreement is valid.