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Posts Tagged ‘Clear and Unmistakable Rule’

New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part II)

August 15th, 2019 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clause Construction Award, Clear and Unmistakable Rule, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, FINRA Arbitration, First Options Reverse Presumption of Arbitrability, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Fifth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Clear and Unmistakable Rule | Analysis

Part I of this post discussed how the Second and Fifth Circuits, in  Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).

Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.

This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.

Making an End Run Around Schein?

Clear and Unmistakable Rule | Circumvent | End Run

When, prior to 20/20 Comm. we wrote about Met Life, we said it “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.” (See here. )

But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.

After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.

Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule

Clear and Unmistakable Rule | Jettison

In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”  

The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.

Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.

Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).

This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.

Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein

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Arbitrability of Arbitrability Questions: the Second Circuit Pushes Back (a little)

April 3rd, 2019 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Contract Interpretation, Contract Interpretation Rules, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Stay of Arbitration, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Thurgood Marshall U.S. Courthouse

Abitrability Questions
Thurgood Marshall U.S. Courthouse, 40 Centre Street, New York, NY 10007

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 herehere, 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.

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Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

June 7th, 2015 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Contract Interpretation, Contract Interpretation Rules, FAA Preemption of State Law, Federal Policy in Favor of Arbitration, Moses Cone Principle, Presumption of Arbitrability, Stay of Litigation, United States Court of Appeals for the Ninth Circuit Comments Off on Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

Introduction

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Back in 1983 the U.S. Supreme Court, in the landmark decision Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (Brennan, J.), famously declared that “[t]he [Federal] Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Moses Cone thus established that there was a presumption in favor of arbitrability in cases governed by the Federal Arbitration Act, a conclusion that a number of other lower courts had previously reached, and which the Court had adopted about 23 years previously as a matter of federal labor law derived from Section 301 of the Labor Management Relations Act (sometimes referred to as the “Taft-Hartley Act”). See United Steel Workers of Am. v. Warrier & Gulf Nav. Co., 363 U.S. 574, 582-83 (1960) (Douglas, J.) (“An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.”)

The presumption of arbitrability is not a talismanic solution to every arbitration-law related problem. In fact it is designed to address only questions about the scope of an arbitration agreement.

The presumption has two related components. First, when courts construe the scope provision of an arbitration agreement to determine what merits-related issues the parties agreed to arbitrate, the court resolves ambiguities in favor of arbitration.  See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995). Second, it presumes that procedural issues arising out of arbitrable disputes, and contract-related defenses to arbitrability—that is, “allegation[s] of waiver, delay and like defenses to arbitrability[,]” are presumptively for the arbitrator. See Moses Cone, 460 U.S. at 24-25; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).

Roughly ten days ago, in a post about U.S. Circuit Judge Richard A. Posner’s Sprint Spectrum decision, we wrote about how some judges have interpreted the presumption too expansively:

The federal policy in favor of arbitration has, at least arguably, been interpreted to apply more expansively than the U.S. Supreme Court likely intended. As a result, even though the U.S. Supreme Court has said many times that arbitration is supposed to be a “matter of contract,” or one of “consent not coercion,” an overly expansive interpretation of the policy has, at least in some cases, arguably resulted in arbitration agreements being placed on a considerably more advantaged footing than ordinary contracts. As we read it, Judge Posner’s comment in Roughneck raises the question whether this might have more to do with “limit[ing] judicial workloads” than a desire to enforce contracts as written and according to their terms.

(Read our Sprint Spectrum post here.)

With all the hoopla about the presumption of arbitrability, one would think it very difficult to find a case that didn’t apply the presumption of arbitrability in a situation where it was supposed to apply it. In general that’s probably true, but on June 2, 2015 the U.S. District Court for the Western District of Washington proved that truth is not a universal one.

In Scolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015) the court considered whether ambiguity created by apparently conflicting forum selections clauses: one arbitral and two judicial. While the Court’s reasoning indicated that it considered the issue before it one of contract interpretation—the resolution of ambiguity—it nevertheless held that the ambiguity had to be resolved against the drafter of the contract, which the district court thought Washington law required, rather than in favor of arbitration, which was what federal law required. While it apparently recognized that application of the presumption, rather than a state-law contra proferentem rule, would have required the court to stay the litigation, it nevertheless denied the requested stay of litigation, concluding that the issue before it concerned the enforceability of the arbitration agreement, rather than an interpretation of its scope.

The net effect of the ruling was for the district court to implicitly have found that a judicial forum selection clause trumped an arbitral one, simply because they overlapped in scope, and that accordingly the arbitral forum selection clause was not enforceable. There was no legal basis for such a finding and the district court cited none.

The seriousness of the error was compounded by the district court’s acknowledgement that the arbitration proponent had advanced a reasonable interpretation of the arbitration agreement and judicial forum selection clauses, which harmonized them, and would have allowed arbitration to proceed, with the district court staying its hand in the interim. Instead of adopting that interpretation, it said that the arbitration challenger’s interpretation was likewise “reasonable,” but the court did not say what the challenger’s interpretation was, and given the disposition of the case, we assume that the “interpretation” was that the parties must not have intended to include a concededly existing and valid arbitration agreement in their agreement. But that interpretation not only ignored the presumption of arbitrability, but the general rule of contract interpretation that one contract provision not be construed to negate another.

We do not know whether the arbitration proponent preserved the argument for appeal, but there was another ground for a stay of litigation in this case that would have bypassed the issue of the presumption of arbitrability. The arbitration agreement contained a delegation clause, which clearly and unmistakably required the parties to submit to arbitration all disputes about arbitrability. Because there was no dispute about the existence or validity of the delegation clause, the Court should have held that the resolution of the apparent conflict between arbitral and judicial forum selection clauses was a question for the arbitrators.

If the arbitration proponent decides to appeal the decision, we hope that the U.S. Court of Appeals for the Ninth Circuit will correct these errors without delay, so that the parties can arbitrate their disputes, which is, after all, what they agreed to do.

Background

yay-12775922-digitalScolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015), arose out of the purchase, sale, termination and buyback of an interest in a limited liability company. Effective January 1, 2013 the plaintiff (the “Buyer”) purchased a ten-percent ownership interest in  Elliot Rust Companies, LLC (the “LLC”), the purchase and sale of which was governed by a “Grant Agreement” executed by the parties “according to the terms of [an] Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013.” Both agreements were apparently part of the same transaction and were entered into at or about the same time.

The Buyer and LLC were the only parties to the Grant Agreement, which provided that the Buyer would acquire its 10% interest “according to the terms of the terms of the Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013

The Grant Agreement provided, among other things, that:

[Scolari] understands, acknowledges and agrees that, upon execution of this Grant Agreement and the joinder to the LLC Agreement, [Scolari] shall, without further action or deed, thereupon be bound by the LLC Agreement, as it may thereafter be restated or amended, as though a direct signatory thereto.

It contained a “jurisdiction” clause that stipulated Washington law as governing and the U.S. District Court for the Western District of Washington as the exclusive judicial forum:

Governing Law: Jurisdiction. This Grant Agreement and the transaction contemplated hereby shall be governed by and construed according to the laws of the state of Washington. With respect to any dispute arising out of or related to this Grant Agreement or the LLC Agreement, the parties hereby consent to the exclusive jurisdiction of the United States District Court for the Western District of Washington. . . .

yay-1916763-digitalThe LLC Agreement, unlike the Grant Agreement, contained a broad arbitration agreement, which said:

Arbitration. All disputes, claims or controversies relating to this Agreement that are not resolved by mediation shall be submitted to final and binding arbitration. . . . Questions or arbitrability or the scope of the parties’ agreement to arbitrate shall be determined by the arbitrator.

But like the Grant Agreement, the LLC Agreement also contained a jurisdiction and venue clause:

Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the United States District Court for the Western District of Washington or the Superior Court of Pierce County. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding.

The LLC terminated the plaintiff on November 6, 2014, and on December 15, 2014 offered to buy plaintiff’s 10% interest out for $158,882.60. The plaintiff refused the offer one week later, claiming that he did not believe it to be accurately valued.

yay-13760132Unable to agree a resolution the plaintiff filed suit in March 2015, requesting a judgment declaring he has a 20% interest in the profits of the LLC, and equitable relief.

The LLC moved on April 3, 2015 to dismiss for improper venue or to stay the action pending arbitration under Section 3 of the Federal Arbitration Act pending arbitration. The Court denied the motion.

The District Court’s Analysis and Conclusions

The Court began its analysis by acknowledging that its “role” was confined “‘to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.’” Slip op. at 4 (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)). If the arbitration proponent establishes that the answers to both questions are “yes,” then, said the Court, the Court must “‘enforce the arbitration in accordance with its terms.’” Slip op. at 4 (quoting 207 F.3d at 1130). And in discussing the standard applicable to question (2), the Court, playing homage to the strong presumption in favor of arbitration, said “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . .’” Slip op. at 4 (quoting 207 F.3d at 1131).

So far, so good. But having accurately stated the governing rules, the Court inexplicably failed to heed them. Continue Reading »

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

April 2nd, 2015 Arbitrability, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Contract Interpretation, Functus Officio, Judicial Review of Arbitration Awards, Practice and Procedure, State Arbitration Law, State Arbitration Statutes, State Courts, United States Supreme Court Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

Part III.B.2

Panel’s Analysis of the Merits of the Arbitrability Issue (Panel Issue No. 1)

Now that we’ve discussed why we think the Court will review the arbitrator’s threshold arbitrability decision de novo, let’s take a closer look at the Panel’s analysis of the arbitrability issue and whether the Texas state courts will conclude that the Panel had the jurisdiction to decide the SCA Parties’ sanctions claims.

yay-15706730-digitalThe procedural posture of  the jurisdictional issue before the Panel is unusual because the Panel, with the parties’ consent, had previously made a partial final award expressing its views on jurisdiction. The intent was to permit expedited judicial review of the issue. The Panel’s 2-1 ruling finding jurisdiction was confirmed by the trial court, which means that the trial court will almost certainly reject Armstrong’s putative challenge to the Panel’s jurisdiction.

The Armstrong Parties’ appeal to the intermediate court of appeals was dismissed for lack of appellate jurisdiction, presumably because the intermediate court of appeals concluded that the trial court’s order confirming the partial final award was not a final order or judgment from which an appeal could be taken. The Armstrong Parties sought temporary relief and mandamus review in the Texas Supreme Court, but the Supreme Court denied those requests.

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Issue No. 1 is simply whether the parties agreed  to submit to arbitration the SCA Parties’ claims against Armstrong relating to Armstrong’s alleged procurement of the consent award through perjury, fraud and other deceptive means. The key question is whether the SCA Parties’ disputes fell within the broad scope of the parties’ arbitration agreement. And the answer is driven in large part by the presumption in favor of arbitration, under which ambiguities about the scope of an arbitration agreement are resolved in favor of arbitration.

By comparison, recall that the answer to the question who decides arbitrability questions was driven by a presumption against arbitration: courts presume that arbitrability questions are for the court to decide unless the parties “clearly and unmistakably” agree to delegate those questions to the arbitrators. The whole point of agreeing to arbitrate is to have arbitrators decide disputes about the merits, and so when the question is whether the parties empowered the arbitrators to decide the merits of a party’s claim for relief, courts presume those questions are for the arbitrators to decide.

The presumption of arbitrability applies to case governed by the Federal Arbitration Act as well as cases falling under the Texas General Arbitration Act. It provides that ambiguities in the scope of an arbitration agreement are to be resolved in favor of arbitration. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Mitsubishi Motors v. Soler Chrysler Plymouth, 473 U.S. 614, 626 (1985); G.T. Leach Builders, LLC v. Sapphire V.P. LP, No. 130497, at *21-22 & nn. 14 & 16 (Tex. Mar. 20, 2015); Branch Law Firm, L.L.P. v. Osborn, 447 S.W.3d 390, 394-98 & n.10 (Tex. App. 14 Dist. 2014). That means that if the scope provision of an arbitration agreement is susceptible to more than one interpretation, and at least one of those interpretations would require the dispute to be submitted to arbitration, then the court, as a matter of law, must find that the parties agreed to submit the dispute to arbitration. Continue Reading »

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.1: Panel Issue No. 1: the Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

March 29th, 2015 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Grounds for Vacatur, Practice and Procedure, State Courts, United States Supreme Court Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.1: Panel Issue No. 1: the Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

Part III.B.1

Panel Issue No. 1: the Armstrong Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

Introduction

Part III.A of our Lance Armstrong Arbitration Award series identified (a) the categories of issues (the “Issue Categories”) that a court can address on a motion to vacate an arbitration award on the ground the arbitrators exceeded their powers (the “Issue Categories”); and (a) the four specific issues that the Panel addressed in its award (the “Panel Issues”).

Panel Issue No. 1 was, as phrased by the arbitrators: “Does this Arbitration Tribunal have the jurisdiction or authority to decide and resolve the existing disputes between the named parties?” That issue falls into Issue Category No. 1: Issues concerning whether the parties delegated to the arbitrators—or were required to delegate to the arbitrators—the power to decide particular disputes.

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Whether or not the Panel had the authority to decide the SCA Parties’ claims against  Armstrong and Tailwind (the “Armstrong Parties”) depends on whether at least one 0f the parties requested the arbitrators to adjudicate those claims; and the other party either: (a) expressly or impliedly consented to the arbitrators deciding the dispute; or (b) objected to the request, but the claims were within the scope of the parties’ written pre- or post-dispute arbitration agreement.   Disputes what issues the parties submitted—or were required to be submit—to arbitration present questions of arbitrability. See, e.g., Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-86 (2002); First Options of Chicago, Inc. v. Kaplan, 543 U.S. 938, 942-45 (1995).

Relationship Between Arbitrability and the Post-Award Standard of Judicial Review

Ordinarily, questions of arbitrability are— in the allocation-of-decision-making-power scheme of things—for the court to decide, unless the parties have clearly and unmistakably agreed to delegate them to arbitrators. See, e.g., First Options, 543 U.S. at 944-45. Under a typical broadly-worded pre-dispute arbitration agreement, the vast majority of disputes that may arise between the parties—including disputes about arbitration procedure—are presumptively arbitrable, that is, they are subject to arbitration unless the parties clearly a nd unmistakably exclude them from arbitration. But when a dispute presents a question of arbitrability, then it is presumptively for the court to decide, that is, they are not subject to arbitration unless the parties clearly and unmistakably include them within the universe of disputes that must be submitted to arbitration.

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Where as here, an arbitrability issue arises at the award enforcement (or back-end) stage of the proceedings—rather than the pre-arbitration,  arbitration-agreement-enforcement (or front-end) stage (i.e., on a motion to compel arbitration or stay litigation)—then whether or not an issue is a question of arbitrability affects the standard of review. The standard of review is, in essence, the degree of deference to  which a court pays the arbitrators’ decisions on matters that are material to applications to confirm, vacate or modify arbitration awards. Continue Reading »

Gateway Keeping: The Third Circuit Joins the Sixth in Holding that Courts get to Decide whether Parties Consented to Class Arbitration

August 28th, 2014 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consent to Class Arbitration, Consolidation of Arbitration Proceedings, Drafting Arbitration Agreements, Existence of Arbitration Agreement, Judicial Review of Arbitration Awards, Practice and Procedure, Stay of Litigation, United States Court of Appeals for the Sixth Circuit, United States Court of Appeals for the Third Circuit, United States Supreme Court Comments Off on Gateway Keeping: The Third Circuit Joins the Sixth in Holding that Courts get to Decide whether Parties Consented to Class Arbitration

On June 10, 2013 the U.S. Supreme Court in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) considered whether an arbitrator exceeded his powers under Federal Arbitration Act (“FAA”) Section 10(a)(4) by finding that a fairly run-of-the-mill arbitration agreement authorized class arbitration. Applying the deferential, manifest-disregard-of-the-agreement outcome-review standard authorized by FAA Section 10(a)(4), the Court upheld an arbitrator’s determination that an arbitration agreement authorized class arbitration because the arbitrator had, at least arguably, interpreted the arbitration agreement, albeit in a highly creative and doubtful way. (See Loree Reins. & Arb. L. Forum posts here, here, here & here.)

In a footnote, the Court explained that it “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability.’” 133 S. Ct. at 2068 n.2. The Court said that Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 680 (2010), “made clear that this Court has not yet decided” whether class-arbitration-consent presents a question of arbitrability. But “Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures[,]” and “Oxford submitted that issue to arbitrator not once, but twice—and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.” 133 S. Ct. at 2068 n.2. (emphasis added)

Had Oxford opted to request the Supreme Court to determine whether class- arbitration consent presented a question of arbitrability, and had the Court determined that it was such a question, then the Court would have determined independently—that is, without deferring to the arbitrator’s decision—whether the parties consented to class arbitration. See BG Group plc v. Republic of Argentina, No. 12-138, slip op. at 6 (U.S. March 5, 2014); First Options of Chicago, Inc. v. Kaplan, 543 U.S. 938, 942 (1995). And we doubt that a majority of the Supreme Court would have upheld the Oxford award had it reviewed the class-arbitration-consent determination de novo. See, e.g., Oxford, 133 S. Ct. at 2071 (Alito, J., concurring) (“If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration … from the fact of the parties’ agreement to arbitrate.”) (quoting Stolt-Nielsen, 559 U.S. at 685).  

Those who have been tracking developments in class and consolidated arbitration since the turn of this century no doubt recall that, after a plurality of the Court determined in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452-53 (2003), that a class-arbitration-consent-related dispute did not present a question of arbitrability, but merely a procedural question, parties began to submit routinely and unreservedly class-arbitration-consent questions to arbitration.

But after Stolt-Nielsen, and, no doubt with renewed vigor after Oxford, class arbitration opponents began to argue that class-arbitration-consent presented a question of arbitrability for the Court to decide. And U.S. Circuit Courts of Appeals are beginning to rule on those challenges.

The first one to do so was the U.S. Court of Appeals for the Sixth Circuit in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), where the Court in November 2013 held “that the question whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.” 734 F.2d at 599 (quotation and citation omitted).

The second, and most recent Circuit Court of Appeals to rule on the issue, was the U.S. Court of Appeals for the Third Circuit in Opalinski v. Robert Half Int’l Inc., ___ F.3d ___, No. 12-4444, slip op. (3rd Cir. July 30, 2014), which on July 30, 2014 “join[ed] the Sixth Circuit Court of Appeals in holding that.  .  .  “the availability of” class arbitration “is a substantive gateway question rather than a procedural one[,]” and thus “is a question of arbitrability.” Slip op. at 15, 16-17.  The Court’s decision turned on “the critical differences between individual and class arbitration and the significant consequences of that determination for both [a] whose claims are subject to arbitration[;] and [b] the type of controversy to be arbitrated.” Slip op. at 15 (emphasis added). Where, as in Opalinski, the arbitration agreement did not “mention” class arbitration, the Court “believ[ed] the parties would have expected a court, not an arbitrator, to determine the availability of class arbitration[,]” and that was “especially so given the critical differences between individual and class arbitration and the significant consequences” of the class-arbitration-consent determination as respects “whose claims are subject to arbitration and the type of controversy to be arbitrated.” slip op. at 16-17.

The Third Circuit’s Opalinski decision, like the Sixth Circuit’s in Reed Elsevier, is well reasoned and reaches the conclusion we likewise think is required by the Supreme Court’s long-line of arbitrability jurisprudence, and by its post-Bazzle class-arbitration cases, beginning with Stolt-Nielsen. We suspect that other circuits will, for largely the same reasons, that class-arbitration-consent presents a question of arbitrability.

Let’s have a look at what transpired in Opalinski.  .  .  . Continue Reading »

Second Circuit Arbitration Roundup 2011: January 1, 2011 – January 14, 2011

January 15th, 2011 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Existence of Arbitration Agreement, United States Court of Appeals for the Second Circuit, United States District Court for the Southern District of New York Comments Off on Second Circuit Arbitration Roundup 2011: January 1, 2011 – January 14, 2011

In the first two weeks of the New Year the United States Court of Appeals for the Second Circuit decided two Federal Arbitration Act cases:  UBS Securities, LLC v. Voegeli, No. 10-0690-cv, slip op. (2d Cir. Jan. 4, 2011) (summary order), and Dedon GmbH v. Janus et Cie, No. 10-4331-cv, slip op. (2d Cir. Jan. 6, 2011) (summary order).  Both cases are summary orders, which under Second Circuit Local Rule 32.1.1, “do not have precedential effect.”  Second Circuit Local Rule 32.1.1(a). 

Each involved a dispute about the existence of an arbitration agreement.  In UBS Securities United States District Judge Denise L. Cote of the United States District Court for the Southern District of New York entered a declaratory judgment that certain Swiss investors could not compel UBS to arbitrate their securities fraud claims, and permanently enjoined the Swiss investors from pursuing their claims in arbitration.  Affirming the district court, the Second Circuit held that UBS satisfied the three requisites of permanent injunctive relief:  1) success on the merits; 2) lack of an adequate remedy at law; and 3) irreparable harm.

As respects success on the merits, the Court held that UBS was not obligated to arbitrate with the Swiss investors, and therefore had succeeded on the merits.  Financial Industry Regulatory Authority (“FINRA”) Code Rule 12200 provides that members can be compelled to arbitrate only 1) pursuant to a written agreement; or 2) where a customer requests arbitration.  FINRA R. 12200.  There was no written agreement to arbitrate between UBS and any of the Swiss investors and the Swiss investors were not customers of UBS.  See UBS Securities, slip op. at 3. 

As respects the lack of an adequate remedy at law and irreparable harm, the Court explained that under  Merrill Lynch Inv. v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003), “[b]eing forced to arbitrate a claim one did not agree to arbitrate constitutes an irreparable harm for which there is no remedy at law.”  Slip op. at 3.  Because UBS was not legally obligated to arbitrate, and because “the lack of an injunction would result in UBS effectively being required to do so, UBS satisfie[d] the ‘irreparable harm’ and ‘lack of an adequate remedy at law’ requirements for an injunction.”  Slip op. at 3.

Dedon concerned the familiar rule that disputes about the existence of a contract containing an arbitration agreement must be decided by the court (absent a clear and unmistakable post-dispute submission of that issue to arbitration).  Janus sought to compel arbitration before the International Chamber of Commerce (“ICC”) of an exclusive-distribution-agreement dispute, contending 1) the parties had agreed to arbitrate “as evidenced by a draft exclusive distribution agreement or the standard terms and conditions that accompanied each purchase;” and 2) Dedon had “waived its right to arbitrate through its conduct before the ICC” in London.  Slip op. at 2.  United States District Judge Colleen McMahon of the United States District Court for the Southern District of New York denied the motion to compel and declined to stay the proceedings pending an ICC determination of the contract formation issue, holding that the dispute concerned the existence of an arbitration agreement and that Dedon had not unreservedly submitted the contract formation issue to ICC arbitration. 

The Second Circuit affirmed.  It said the United States Supreme Court in Granite Rock Co. v. Int’l Bhd. of Teamsters, ___ U.S. ___, 130 S. Ct. 2847, 2857-58 (2010), had “reconfirm[ed]” the Second Circuit’s “well-established precedent that where a party challenges the very existence of a contract containing an arbitration clause, a court cannot compel arbitration without first resolving the issue of the contract’s existence.”  Slip op. at 3 (citing Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972); Sphere Drake Ins. Ltd v. Clarendon Nat’l Ins. Co., 263 F.3d 26, 30 (2d Cir. 2001); Denny v. BDO Seidman LLP, 412 F.3d 58, 68 (2d Cir. 2005); Opals on Ice Lingerie v. Body Lines Inc., 320 F.3d 362, 369 (2d Cir. 2003); Sprecht v. Netscape Commc’ns Corp., 306 F.3d 17, 26 (2d Cir. 2002)).  Because Janus sought to compel arbitration based on a draft agreement containing an arbitration clause, the district court had to decide whether the parties had agreed to arbitrate. 

The Court held that Dedon had not waived its right to court determination of the contract formation issue.  The Court said that “Dedon’s submissions to the ICC were replete with statements that Dedon disputed the ICC’s jurisdiction; such repeated objections to ICC jurisdiction prevent a finding of waiver.  .  .  .”  Slip op. at 5 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946 (1995); Opals on Ice, 320 F.3d at 368).   

The Court also rejected Janus’ argument that an agreement to arbitrate “may be found in the terms and conditions that accompanied each purchase order between Dedon and Janus.”  Slip op. at 5:

On their face, the terms and conditions in those purchase orders govern the particular exchange of goods occurring with that purchase order — “[a]ll contractual and extra-contractual disputes arising out of or in connection with contracts to which these International Terms and Conditions apply, shall be finally resolved by arbitration” (emphasis added) — and do not purport to create or refer to any exclusive distribution relationship between the parties, which is the sole focus of the present suit. 

Janus also argues that the exclusive distribution agreement should be encompassed within the meaning of ‘pre-contractual and collateral obligations’ to the purchase orders.  Janus would thus have this court find that “any dispute related to any obligation arising prior to or outside of the contract formed by each shipment of goods” is governed by the purchase orders’ terms and conditions.  (emphasis in original)  We decline to adopt Janus’s broad reading of that contractual language, as it ignores the plain language of the purchase order, and we agree with the district court that the terms and conditions do not provide an alternative basis for compelling arbitration.

Slip op. at 5-6 (emphasis in original).

Dedon — the party who prevailed in the district court — argued that the district court should have denied the motion to compel with prejudice.  Dedon relied on Kahn Lucas Lancaster, Inc. v. Lark Int’l Ltd., 186 F.3d 210, 218 (2d Cir. 1999), partially abrogated on other grounds by Sarhank Group v. Oracle Corp., 404 F.3d 657, 660 n.2 (2d Cir. 2005), which held that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration agreements, to be enforceable, “must be signed by the parties or contained within an exchange of letters or telegrams.”   186 F.3d at 218) (quoting Article II of the Convention).  But Dedon did not raise that argument before the district court, and so the Court said “the parties will have the opportunity to argue this issue at the trial on the existence of a contact.”  Slip op. at 6-7.  The Court also noted that the district court may “consider what effect, if any, [the Court’s] holding in Kahn Lucas has on any renewed motion to compel.”  Slip op. at 7.

 

[EDITOR’S NOTE:  (Summary orders “filed on or after January 1, 2007 may be cited in a document filed” with the Second Circuit, subject to Rule 32.1 of the Federal Rules of Appellate Procedure and Local Rule 32.1.1.  See Second Circuit Local Rule 32.1.1(b)(1) ; Fed. R. App. P. 32.1.  “[A] party must cite either the Federal Appendix or an electronic database (with the notation ‘summary order)[,]” and “must serve a copy of it on every party not represented by counsel.”    Second Circuit Local Rule 32.1.1(c) & (d).]

The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

June 21st, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

Yesterday the United States Supreme Court decided Rent-A-Center West v. Jackson, ___ U.S. ___, slip op. (June 21, 2010).  Rent-A-Center raised the question whether “a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”  The United States Court of Appeals for the Ninth Circuit had said “yes,” but the Supreme Court said “no.”

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable.  The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.  

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of  Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).   And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was  joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor.  See Dissenting Op. at 1.  (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle.  See Slip op. at 9.)  Continue Reading »

When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights?

April 6th, 2010 Arbitrability, Authority of Arbitrators, Employment Arbitration, New York Court of Appeals, United States Supreme Court Comments Off on When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights?

Introduction

Under the federal Federal Arbitration Act statutory claims are generally arbitrable if they fall within the scope of the arbitration agreement, but arbitrator and arbitration-service-provider fees that may impose undue financial burdens on employees or other individuals seeking to vindicate those rights.   Cost provisions in arbitration agreements allocate these fees and costs, and even when the allocation is 50-50, disputes may arise concerning whether they are so burdensome as to effectively deny one of the parties a forum in which to pursue his or her claims.   

In Green Tree Financial Corp v Randolph, 531 U.S. 79 (2000), the United States Supreme Court acknowledged that “the existence of large arbitration costs could preclude a litigant from effectively vindicating her federal statutory rights in the arbitral forum.”  531 U.S. at 90.  And it said that “where, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring costs that would deter the party from arbitrating the claim.”  531 U.S. at 92.   While the Court did not purport to enunciate the standards courts should apply in evaluating challenges to cost provisions, it held that the “risk” of  “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”  531 U.S. at 91. Continue Reading »

SCOTUS Oral Argument in Jackson v. Rent-A-Center West, Inc. Set for April 26, 2010

February 17th, 2010 Arbitrability, Authority of Arbitrators, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on SCOTUS Oral Argument in Jackson v. Rent-A-Center West, Inc. Set for April 26, 2010

The United States Supreme Court has set for April 26, 2010 oral argument in Jackson v. Rent-A-Center West, Inc., ___ F.3d ___, slip op. (9th Cir. Sept. 9, 2009), petition for cert. granted  Jan. 15, 2010 (No. 09-497) (oral argument calendar here).  Jackson addresses the question who decides unconscionability of an arbitration agreement when the agreement clearly and unmistakably says arbitrators decide arbitrability.  The Ninth Circuit said the court decides the question, but we think there is a reasonable chance the United States Supreme Court will reverse.   We touched on some of the reasons why in prior posts, here and here

We shall keep readers apprised of further developments as and when they occur.  .  .  .