In a January 16, 2019 post (here) on the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. (January 8, 2019), we explained that arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See also Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)
Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. It might, for example, state that the parties agree to submit to arbitrators questions concerning their “jurisdiction,” or the “existence, scope, or validity” of the arbitration agreement.
The U.S. Court of Appeals for the Second Circuit, however, does not require the parties to expressly state in their agreement that they agree to submit arbitrability questions to the arbitrators. The Second Circuit has found that the parties may “clearly and unmistakably” submit arbitrability questions to arbitration when they agree to a very broad arbitration clause. See Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 394, 396 (2d Cir. 2018) (An agreement “to arbitrate any dispute, claim or controversy that may arise between you and Wells Fargo Advisors, or a client, or any other person[, and] . . . giving up the right to sue Wells Fargo Advisors . . . in court concerning matters related to or arising from your employment” “demonstrate[d] the parties’ clear and unmistakable intent to arbitrate all questions of arbitrability.”); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) (A contractual provision that “any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration” and that “the parties are waiving their right to seek remedies in court” clearly and unmistakably demonstrated “parties’ intent to arbitrate all issues, including arbitrability.”) (emphasis omitted); Alliance Bernstein Investment Research and Management, Inc. v. Schaffran, 445 F.3d 121 (2d Cir. 2006) (NASD Code Rule 10324, which authorized arbitrators “to interpret and determine the applicability of all provisions under [the] Code[]” was a clear and unmistakable delegation to arbitrators of arbitrability questions concerning interpretation of the NASD Code.).
In Metropolitan Life Ins. Co. v. Bucsek, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), the Second Circuit was faced with an unusual situation where party A sought to arbitrate against party B, a former member of the Financial Industry Regulatory Authority (“FINRA”)’s predecessor, the National Association of Securities Dealers (“NASD”), a dispute arising out of events that occurred years after party B severed its ties with the NASD.
The district court rejected A’s arguments, ruling that: (a) this particular arbitrability question was for the Court to decide; and (b) the dispute was not arbitrable because it arose years after B left the NASD, and was based on events that occurred subsequent to B’s departure. The Second Circuit affirmed the district court’s judgment.
After the district court decision, but prior to the Second Circuit’s decision, the U.S. Supreme Court decided Schein, which—as we explained here—held that even so-called “wholly-groundless” arbitrability questions must be submitted to arbitration if the parties clearly and unmistakably delegate arbitrability questions to arbitration. Schein, slip op. at *2, 5, & 8.
The Second Circuit faced a situation where a party sought to arbitrate a dispute which clearly was not arbitrable, but in circumstances under which prior precedent, including Alliance Berstein (cited above), suggested that the parties clearly and unmistakably agreed to arbitrate arbitrability.
To give effect to the parties’ likely intent that they did not agree to arbitrate arbitrability questions that arose after B left the NASD, the Second Circuit had no choice but distinguish and qualify its prior precedent without falling afoul of the Supreme Court’s recent pronouncement in Schein. That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis that courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.
Metropolitan Life is an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.
It is easy to see how applying Metropolitan Life in future cases could raise some interesting and challenging questions for parties, their attorneys, and the courts. We may look at those challenges in more detail in a future post, but for now, let’s take a careful look at the Second Circuit’s decision.
Metropolitan Life Ins. Co. v. Bucsek, No. 17-881, slip op. (2d Cir. Mar. 22, 2019) Background
A and B’s legal relationship commenced in 2002, when A became a retail distributor of B’s financial products, including through B’s “Premier Client Group.” A “was registered with the NASD as a securities industry representative of B.” Slip op. at 3.
In July 2007, B terminated its relationship with the NASD. It never became a member of the NASD’s successor, FINRA.
During the period 2002 until July 2007, B was subject to the “NASD Code of Arbitration Procedure (“NASD Code”), Rule 10201 of which required B to arbitrate disputes between members and “persons associated with a member.” Under the NASD Bylaws, A was a “person associated with a member.” See slip op. at 3.
In 2002 B executed a Form U-4, “Uniform Application for Securities Industry Registration or Transfer,” that required B to arbitrate: “any dispute, claim or controversy that may arise between me and my firm. . . that is required to be arbitrated under the rules, constitutions, or by-laws of [the NASD] . . . as may be amended from time to time.” Slip op. at 3-4.
A’s relationship with B continued for 11 years after B left the NASD, terminating on July 1, 2016, when another insurance company purchased B’s “Premier Client Group.” Slip op. at 4.
A demanded arbitration against B on July 11, 2016, “asserting [against B] claims related to unfair compensation, including breach of contract, fraud, negligence, and violation of the New Jersey Wage Payment Law, N.J.S.A §§ 34.11-4.1 et seq.” Slip op. at 4. These claims were predicated on events that occurred during B’s employment of A during the period 2011 through July 1, 2016. Slip op. at 4-5.
A’s arbitration demand prompted B to move FINRA (NASD’s successor) to dismiss the claims on the ground that the NASD (or FINRA) Code did not require B to arbitrate the dispute. The Director of FINRA’s Office of Dispute Resolution denied B’s motion, which prompted B to file an action in the United States District Court for the Southern District of New York to enjoin the arbitration. The district court granted B’s application for preliminary injunctive relief, finding that the B had shown the requisite probability of success both on the arbitrability question and the issue of who decides arbitrability questions. Slip op. at 5. The Second Circuit affirmed.
Did the Parties Clearly and Unmistakably Agree to Arbitrate Arbitrability Questions?
Both the arbitrability, and the who gets to decide arbitrability, questions turned on certain provisions of the applicable NASD or FINRA Codes. Without deciding which code applied, the Court found that the pertinent parts of both were not materially different. The Court’s discussion focused on the FINRA Code because it was the code that the parties and the district court agreed was applicable.
Three Pertinent FINRA Code Provisions
There were three FINRA Code provisions that were pertinent to the arbitrability question. The first, FINRA Rule 13200 (which the Court said was “substantially identical to NASD Code Rule 10101”), provides:
[A] dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons.
FINRA Rule 13200; slip op. at 7.
The parties did not dispute that, until B withdrew from the NASD, B was a “Member,” and A was an “Associated Person.” Slip op. at 7.
The second FINRA Code provision, FINRA Rule 13413 (which, according to the Court, is “substantially identical . . . to NASD Rule 10324”), provides:
The [arbitration] panel has the authority to interpret and determine the applicability of all provisions under the Code. Such interpretations are final and binding upon the parties.
FINRA Rule 13413, slip op. at 7.
The third FINRA Code provision, FINRA Rule 13100, provides that a “member” is: “[A]ny broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled. . . .” FINRA Rule 13100; slip op. at 7-8.
Do the FINRA Code Provisions Evidence a Clear and Unmistakable Agreement to Arbitrate Arbitrability Questions?
After discussing how and why it is that courts must enforce the parties’ “clear and unmistakable” agreement to arbitrate arbitrability questions (see slip op. at 8-12), the Court explained that the “clear and unmistakable” question required the Court to “determine whether . . . either the NASD or the FINRA version [of the arbitration Code] . . . reflects a clear and unmistakable agreement by the parties to have the question of the arbitrability of their dispute determined by arbitrators rather than the court.” Slip op. at 12.
The Court observed that “neither version of the Code directly addresses the [clear and unmistakable agreement] question.” Slip op. at 12. Accordingly, the court had to “look to other provisions of the agreement to see what contractual intention can be discerned from them.” Slip op. at 12.
A New Interpretative Rule to Ascertain Clear and Unmistakable Intent to Arbitrate Arbitrability Questions
Effectively articulating a new interpretative rule necessitated by the unusual case before it, the Court said “what the arbitration agreement says about whether a category of dispute is arbitrable can have an important bearing on whether it was the intention of the agreement to confer authority over arbitrability on the arbitrators.” Slip op. at 13-14.
To that end, said the Court, “broad language expressing an intention to arbitrate all aspects of all disputes supports the inference of an intention to arbitrate arbitrability, and the clearer it is from the agreement that the parties intended to arbitrate the particular dispute presented, the more logical and likely the inference that they intended to arbitrate” arbitrability questions. Slip op. at 12-13 (citations and quotations omitted).
The contrapositive, the court explained, was also true (at least conditionally): “the clearer it is that the terms of an arbitration agreement reject arbitration of the dispute, the less likely it is that the parties intended to be bound to arbitrate the question of arbitrability, unless they included clear language so providing . . . .” Slip op. at 13. But, added the Court, “vague provisions as to whether the dispute is arbitrable are unlikely to provide the needed clear and unmistakable inference of intent to arbitrate arbitrability.” Slip op. at 13.
What the Court appears to be saying is that where the parties have not expressly, clearly and unmistakably expressed their intent to arbitrate arbitrability questions, the strength of the inference of clear and unmistakable intent to arbitrate arbitrability is inversely proportional to how clear it is that the terms of the agreement reject arbitration of the dispute.
In other words, if the terms of the agreement strongly suggest that a court, rather than an arbitrator, should resolve the dispute on its merits, then the strength of the inference of clear and unmistakable intent to arbitrate the arbitrability of the dispute will be weaker. But, all else equal, if the terms of the agreement suggest that an arbitrator rather than a court should resolve the dispute on its merits, then the inference of clear and unmistakable intent to arbitrate arbitrability of the dispute will be stronger.
Having articulated the new interpretative rule, the Court proceeded to examine – and determine — the question of arbitrability presented in light of the three FINRA Code provisions (and their NASD counterparts).
The Court held that “[t]he NASD/FINRA Code cannot reasonably be interpreted to provide for arbitration of [A’s]claims . . . .because [those claims] are based on events that occurred years after [A and B] had ceased to have any connection with the NASD.” Slip op. at 14. “The claims,” said the Court, “relate to events for which the NASD and FINRA have no regulatory interest.” Slip op. at 14.
FINRA Rules 13200 and 13100 did not Make A’s Claims Arbitrable
Recall that there was no dispute about whether, during the period 2002 through July 1, 2007, B was, for purposes of FINRA Rule 13200, a “Member,” and A was an “Associated Person.” Thus, if the events giving rise to the dispute occurred during the period that B was a Member, and A was an Associated Person, then presumably there would not have been any dispute that the dispute was arbitrable. Rule 13200 expressly provides that such disputes must be submitted to arbitration. See FINRA Rule 13200.
But here the events giving rise to the parties’ dispute occurred after B left the NASD, and B never became a Member of NASD’s successor, FINRA. A argued that FINRA Rule 13100 provided that disputes based on events occurring after a Member’s departure were arbitrable because it defined as a “member:” “[A]ny broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled. . . .” FINRA Rule 13100; slip op. at 14 (emphasis added).
The Court held that A’s “asserted interpretation of Rule 13100 is untenable and would produce absurd results that could not have been intended by FINRA or any of the contracting parties that subjected themselves to the FINRA Code.” Slip op. at 15. A’s “proposed interpretation,” said the Court, “would mean that all persons or entities that were ever subject to FINRA’s arbitration Code would forever remain subject to it with regard to future disputes between them, even if the future disputes concerned events that occurred years, decades, or even centuries after either of the parties to the dispute had ceased to have any connection with FINRA.” Slip op. at 15.
The Court supported its argument for the absurdity of the interpretation by positing two hypotheticals. “Suppose,” said the Court, “that two business entities were FINRA members for the same brief period of time, and that each soon thereafter abandoned the securities business, withdrew from FINRA, and went on to conduct business in completely different areas of enterprise.” Slip op. at 15-16. “Decades or centuries later,” supposed the Court, “a new business dispute arose between them that had nothing to do with FINRA, with the securities business, or with the past experiences of either of them during the brief, long-forgotten time when they were both members of FINRA.” Slip op. at 16. A’s “interpretation of Rule 13100 would mean that the dispute must be arbitrated because each entity had, in perpetuity, surrendered its right to have new disputes between them adjudicated by a court of law, and had instead committed itself in perpetuity to arbitrate any such disputes before FINRA.” Slip op. at 16.
The Court’s second hypothetical was “in the context of disputes between employer and employee . . . .” Slip op. at 16. In that context, A’s “interpretation would mean that, if a registered representative entered the employ of an NASD member, in contemplation of the member and the representative immediately quitting the securities business and embarking together in a different unrelated field of business, then for as long as the employment relationship continued following their joint withdrawal from the securities business and NASD supervision, either could compel the other to surrender the right to court adjudication in favor of FINRA arbitration of any dispute relating to their future ‘business activities’” Slip op. at 16-17. “That interpretation,” said the Court, “would be incompatible with the reasonable expectations of the parties to the arbitration agreement, and could not reasonably be inferred from their long prior acceptance of submission to the FINRA or NASD Code.” Slip op. at 17.
In addition that interpretation would not make “any sense from the point of view of FINRA.” Slip op. at 17. “FINRA,” the Court explained, “would have no reason to arbitrate a dispute relating to business activities that had nothing to do with FINRA’s regulatory interests merely because once, in the distant past, the disputants had briefly been under FINRA’s supervision.” Slip op. at 17. The Court agreed with the district court that no “FINRA member would have contemplated that its FINRA membership would perpetually subject it to FINRA’s arbitration requirement, even for causes of action arising long after its membership ended.” Slip op. at 17 (quotation and citation omitted).
The Second Circuit also explained that other courts that had considered the same interpretation of FINRA Rule 13100 “sensibly rejected it.” Slip op. at 17. Those “courts have uniformly concluded that the Code’s continuation of ‘member[ship]’ following termination or cancellation means, as [B] advocates, that if the material events that gave rise to a dispute occurred while a party was a functioning member, that party is bound for the purposes of that dispute, even if it has subsequently cancelled its membership or been expelled.” Slip op. at 17-18 (quotation in original; citing Christensen v. Nauman, 73 F. Supp. 3d 405, 411 n.4 (S.D.N.Y. 2014)(explanatory parenthetical omitted; quotation and citation omitted)).
The Court therefore concluded that, “insofar as demonstrated on the motion for preliminary injunction, if the arbitrability of this dispute is to be determined by the court, it is not arbitrable.” Slip op. at 18.
Recognizing that “that the non-arbitrability of the dispute does not determine whether the question of arbitrability is for the court or for arbitrators,” and that “parties may consent to submit arbitrability to the arbitrators even for disputes which clearly do not fall within the scope of their agreement to arbitrate[,]” the Court next considered A’s “argument that the arbitration code provides for arbitration of the question of arbitrability.” Slip op. at 19.
FINRA Rule 13413 and Alliance Bernstein do not Require Arbitration of Arbitrability Questions
A’s argument for arbitration of arbitrability questions was based on FINRA Rule 13413, and the Second Circuit’s decision in Alliance Bernstein, which had interpreted the NASD’s version of 13413 as evidencing clear and unmistakable consent to arbitrate arbitrability questions that turned on NASD Code provisions. See slip op at 19.
FINRA Rule 13413 empowers FINRA arbitrators “to interpret and determine the applicability of all provisions under the [FINRA] Code[,]” and makes “[s]uch interpretations . . . final and binding upon the parties.” In Alliance Bernstein the Court “concluded that NASD Rule 10324, which is substantially identical to FINRA 13413, evidenced a clear and unmistakable intention in an arbitration that incorporated the NASD Code to have the arbitrators decide arbitrability of a question that turned on interpretation of the Code.” Slip op. at 19.
A argued that Alliance Bernstein controlled the outcome here—the merits of the arbitrability question turned on an interpretation of FINRA Rules 13200 and 13100, FINRA Rule 13413 authorized the arbitrators to interpret the FINRA Rules, those interpretations were binding on the parties, and the Second Circuit had previously held that the parties’s consent to FINRA Rule 13413 constituted clear and unmistakable consent to arbitrate arbitrability questions.
But the Court rejected A’s Alliance Bernstein argument because the circumstances presented in this case were very different from those in Alliance Bernstein. In Alliance Bernstein the events took place during the period that the NASD-member employer was a member of the NASD and the employee was an “associate person.” Thus there was no question whether the NASD Code applied to the dispute. Slip op. at 20.
The arbitrability argument depended on whether the associated-person employee’s whistle-blower claim was an “employment discrimination” claim. For under the NASD Code disputes between members and associated persons were arbitrable unless they constituted “employment discrimination” claims. Slip op. at 20-21.
The Court explained that “[g]iven . . . that neither in our case nor in Alliance Bernstein does the arbitration agreement contain language directly addressing the question who should decide the arbitrability of the dispute, the courts are required in both cases to examine other provisions of the agreement to interpret the contractual intent of the parties on that issue.” Slip op. at 21. In Alliance Bernstein,” said the Court, “it was beyond dispute that the controversy was generally covered by the NASD Code and a high likelihood furthermore that it was arbitrable.” The dispute there involved the “business activities of a member in relation to an associated person while both were subject to NASD supervision,” and “it was [thus] indisputably within the general scope of the arbitration Code.” Slip op. at 21-22. Further, the Court explained, “the asserted violation of law [in Alliance Bernstein], the termination of an employee by reason of [whistle-blowing] actions of the employee that are harmful to the interests of the employer, is sufficiently different from the conventional understanding of ‘discrimination,’ as to give strong support to arbitrability under the Code provisions.” Slip op. at 22. Accordingly, “[t]he rule empowering the arbitrators to interpret the Code therefore supported the conclusion that the agreement intended to give the arbitrators authority over the question of arbitrability, and there was nothing in the agreement to support a contrary interpretation.” Slip op. at 22.
In “contrast” to Alliance Bernstein “the agreement cannot be reasonably interpreted to provide for arbitration of the dispute.” Slip op. at 22. Even though “that . . . does not preclude construing an agreement as providing for arbitration of arbitrability, it is a substantial makeweight against such a conclusion unless counterbalanced by clear language contradicting the logical inference that parties who clearly agree not to arbitrate a particular type of dispute are unlikely to intend to arbitrate the arbitrability of such a dispute.” Slip op. at 22.
NASD Rule 10324 was in Alliance Bernstein sufficient to support the inference of intent to arbitrate arbitrability in circumstances of a dispute between a current NASD member and associated person where there was no evidence pushing in the opposite direction . . . .” But it “is not necessarily sufficient to support a clear and unmistakable inference of intent to arbitrate arbitrability when other aspects of the agreement argue powerfully against that inference.” Slip op. at 23.
The Court thought “it extraordinarily unlikely that the Alliance Bernstein panel could have reached the same result if its claimant, like [A], had been seeking arbitration of a dispute based on facts that occurred years after he and his employer had ceased to operate under the regulatory authority of the NASD.” Slip op. at 23. That “panel cannot,” said the Court, “have anticipated that its altogether reasonable holding in those circumstances would be applied to a far-fetched claim of arbitrability of a dispute based on facts that arose long after the parties had withdrawn from NASD supervision.” Slip op. at 23.
Summarizing its detailed discussion of Rule 13413, the Court said the Rule’s “support for an inference of contractual intent to confer arbitrability on the arbitrators is only moderate.” Slip op. at 23. It “makes clear that arbitrators do not lack authority to interpret the Code and determine the applicability of its provisions, but it does not suggest that this power belongs exclusively to arbitrators.” Slip op. at 23. As respects “a claim based on events that occurred years after both parties to the dispute had severed all connections with the NASD, this provision fails to support a clear and unmistakable inference that the contract intended to confer the resolution of arbitrability on the arbitrator.” Slip op. at 23-24.
The U.S. Supreme Court’s Decision in Schein did not Require Arbitration of Arbitrability Questions
A argued that under the U.S. Supreme Court’s decision in Schein “a court considering whether the arbitration agreement confers authority over arbitrability . . . [questions] may not consider whether the agreement calls for arbitration of the dispute.” Slip op. at 24. But the Court said “[t]he point of the [Schein] opinion was that, where the parties have agreed to submit arbitrability to arbitration, courts may not nullify that agreement on the basis that the claim of arbitrability is groundless.” Slip op. at 24 (emphasis in original). The Court repeated “that a claim of arbitrability is groundless does not necessarily mean that the parties did not intend to have the question of arbitrability determined by arbitrators[,]” for “[t]he parties might nonetheless have agreed to submit arbitrability to arbitrators, and the court should not conclude otherwise without having explored the intentions of the contract on that question.” Slip op. at 25. The non-existence of the so-called “‘wholly groundless exception’ to enforcing an arbitration agreement that gives the arbitrators authority over the question of arbitrability does not suggest that, in interpreting the agreement to discern whether [the parties] . . . intended to confer the resolution of arbitrability on the arbitrators, the court should not consider all pertinent evidence.” Slip op. at 25.
The Court said it “reject[s] [A’s] claim for arbitration of arbitrability not because” it considers the “claim of arbitrability” to be “groundless[,]” but “because, upon consideration of all evidence of the intentions of the arbitration agreement, including the groundlessness of [A’s] claim of arbitrability, the agreement does not clearly and unambiguously provide for arbitration of the question of arbitrability.” Slip op. at 25. That “reasoning is based on the parties’ contract, and not based on any exception to what the parties have contracted for.” Slip op. at 25.
Want to learn more about arbitrability?
Review Loree Reinsurance and Arbitration Law Forum Posts here, here, here, here, and here.
Photo Acknowledgments
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. L&L added text to the third and seventh pictures from the top.
Tags: Alliance Bernstein Investment Research and Management Inc. v. Schaffran, arbitrability question, Arbitrate Arbitrability, Clear and Unmistakable, Clear and Unmistakable Rule, Delegation Clause, Delegation Provision, employment dispute, Employment Disputes, FINRA, FINRA Rule 13100, FINRA Rule 13413, FINRA Rule13200, First Options of Chicago Inc. v. Kaplan, Intent to Arbitrate, Metropolitan Life Ins. Co. v. Bucsek, NASD, NASD 13413, NASD Rule 10324, Painewebber Inc. v. Bybyk, Preliminary Injunction, Question of Arbitrability, Rent-a-Center West v. Jackson, Second Circuit, U-4, U.S. Court of Appeals for the Second Circuit, Uniform Application for Securities Industry Registration or Transfer, Wells Fargo Advisors LLC v. Sappington, Wholly Groundless Exception
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