A federal appeals court has reversed a ruling denying arbitration in a dispute between buyers and sellers of commercial cleaning franchises, finding the decision should rest with an arbitrator.

The U.S. Court of Appeals for the Third Circuit panel said its ruling is based on the inclusion of the American Arbitration Association's commercial arbitration rule included in the operative agreement between the parties. The decision overturned a ruling by U.S. District Judge Michael Shipp finding that those rules did not apply to an "unsophisticated party," such as the plaintiffs.

The panel sent the case back for additional discovery, which may clarify the rights of defendant Coverall North America in the suit brought by Ericka Richardson and Luis Silva, Third Circuit Judge Paul Matey wrote, joined by Judges Michael Chagares and Julio Fuentes.

Richardson and Silva bought commercial cleaning franchises from Coverall through a "master franchisee" called Sujol, doing business as Coverall of Southern New Jersey. They later filed a class action claiming they are the employees, not independent contractors.

Coverall and Sujol moved to stay the case pending mediation and arbitration, but Shipp denied the motion. Coverall and Sujol appealed, and the panel said the AAA rules "clearly and unmistakably govern arbitrability of the case because the arbitration clause includes the AAA rules. Rule 7(a) of the AAA rules states that '[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim,'" Matey wrote.

Plaintiffs' claim that their lack of sophistication should exempt them from arbitration fails because courts have found that incorporation of the AAA arbitration rules constitutes "clear and unmistakable" evidence that the parties agreed to arbitrability, Matey ruled.

The panel also reversed Shipp's finding that Coverall could not enforce the arbitration clause between Richardson and Sujol, which was based on a finding that it was not a third-party beneficiary of that agreement. On appeal, Coverall raised several arguments to allow it to compel arbitration, some raised for the first time on appeal and others only dealt with in a cursory manner in the court below, Matey said.

"All are best fully considered by the district court in the first instance, a path that follows from our conclusions on the Silva agreement. Because we hold that Silva and Sujol agreed to delegate arbitrability, we likewise will vacate the District Court's determination that Silva's arbitration clause does not encompass his claim against Sujol," Matey wrote for the panel.

Justin Santagata of Kaufman, Semeraro & Leibman in Fort Lee, who represented Sujol, said the ruling was significant because the Third Circuit sided with other appeals courts in its determination that arbitrability questions are meant to be answered by arbitrators.

Norman Leon of DLA Piper in Chicago, who represented Coverall, and Adelaide Pagano of Lichten & Liss-Riordan in Boston, representing Richardson and Silva, did not respond to requests for comment.