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What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIB)

April 6th, 2009 Arbitrability, Authority of Arbitrators, Legislative Developments Comments Off on What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIB) By Philip J. Loree Jr.

Part IIIB:  Interpreting Proposed Section 2(c) Narrowly

Introduction

In Part IIIA we discussed what we call the “Broad Construction” of the Arbitration Fairness Act of 2009, and showed how the Act could be construed to abrogate in all commercial disputes:  (a) the doctrine of severability; and (b) deferential review under the Federal Arbitration Act (“FAA”) of arbitrator determinations of arbitrability in cases where the parties clearly and unmistakably submit arbitrability questions to the arbitrators (the “Own Jurisdiction Rule”).  In this Part IIIB and in Part IIIC we discuss the “Narrow Construction”, which would limit the scope of Proposed Section 2(c) to situations where the party resisting arbitration claims that the arbitration clause requires predispute arbitration of consumer, franchise, employment or statutory civil rights disputes.  

The Narrow Construction

The Narrow Construction is more technical and complex than the Broad Construction.  Among other things, it requires the court to read Proposed Section 2(c)’s prefatory language “except as otherwise provided in this title” as referring not only to the plain text of Proposed Section 2(a) – which incorporates in pertinent part text that is currently contained in FAA Section 2 – but also the interpretive gloss the United States Supreme Court has placed on FAA Section 2.  As we shall see in Part IIIC, the severability doctrine is at least loosely based on the text in Proposed Section 2(a) and, perhaps with less force, the same can be said of the Own Jurisdiction Rule. 

The Narrow Construction rests on five premises, which are set forth below.  (For reference purposes the pertinent text of Proposed Section 2, with the key, newly added provisions in bold is quoted at the end of this post):     
 
• Premise 1.  The doctrine of severability is derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).
     
• Premise 2.  For different reasons, the Own Jurisdiction Rule is also derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).     

• Premise 3.  Proposed Section 2(c)’s “except as otherwise provided in this chapter” prefatory language was intended to refer not only to Proposed Section 2(a)’s text, but also to judicial doctrines derived from that text.  

 Premise 4.  The “except as otherwise provided language in this title” language in Proposed Section 2(a) was intended to exempt the disputes listed in Proposed Section 2(b) from the command of Proposed Section 2(a). 

• Premise 5.  Proposed Section 2(a)’s “except as otherwise provided in this title” language was not intended to mean that doctrines judicially derived from the text of Proposed Section 2(a) are subject to Proposed Section 2(c). 

We shall explore the validity of these premises in Part III.C.  Reasonable minds can easily differ on that score.
 
Perhaps the best argument for the Narrow Construction lies not in its means, but in its end.  The main purpose of the Fairness Act is to exempt from enforceability predispute arbitration agreements to the extent they require arbitration of consumer, employment, franchise or statutory civil rights disputes.  Jettisoning the severability doctrine and Own Jurisdiction Rule for all purposes  is not necessary to achieve that goal.  Conversely, the severability doctrine and Own Jurisdiction Rule are inimical to the statute’s main purpose to the extent that they are applied to disputes over whether an  arbitration agreement falls under Proposed Section 2(b).

Suppose parties A and B enter into a contract containing an arbitration agreement that clearly and unmistakably requires the parties to submit arbitrability questions to the arbitrators.  Party A subsequently claims that the arbitration agreement is unenforceable because it allegedly requires arbitration of  a “consumer dispute”, but B disagrees.  Under the Own Jurisdiction Rule, the arbitrators would decide whether the dispute falls under Proposed Section 2(b), and the arbitrators’ decision would be subject only to the deferential review afforded by Sections 10 and 11 of the FAA.  The drafters of the Fairness Act presumably wanted courts, not arbitrators, to decide whether or not a dispute falls under Proposed Section 2(b) – in which case it would not be arbitrable – or Proposed Section 2(a) – in which case it would. 

Just as the Own Jurisdiction Rule may frustrate the main purpose  of the Fairness Act, so too may the severability doctrine.  Whether or not the dispute is a consumer dispute may depend on what the contract says.  Under the severability doctrine, that would be a question for the arbitrators.

But ends do not justify means, and the means that the Fairness Act’s drafters have chosen to accomplish these apparently desired ends are inadequate.  First, as we shall see in Part IIIC, the premises of the Narrow Construction are open to question, and even if those premises are supportable, the road from the premises to the conclusion is a torturous one.  In that respect, the Broad Construction arguably fares better.
 
Second, if the drafters intended to limit the scope of Proposed Section 2(c) to cases where one of the parties claims that the arbitration agreement falls under Proposed Section 2(b), then drafters could have easily drafted the Act to say that.  Legislative ambiguity where clarity could easily be accomplished suggests that the drafters had something other than the Narrow Construction in mind, but, for whatever reason, were reluctant to say so.     

Third, the ambiguity may be costly from a public policy perspective.   Whether or not the ambiguity is clarified, by removing a large number of disputes from arbitration and placing them in the court system, the Act will greatly increase the burden on an already overburdened judiciary.  But the litigation between sophisticated, commercial entities that may result from the ambiguity will further burden the courts. 

In any event, if the drafters intended the Narrow Construction to prevail, but the courts adopt the Broad Construction, then the burden on the courts will be increased even more than the drafters intended.  If the drafters intended the Broad Construction to prevail, but the Narrow Construction is adopted, then the ambiguity will likewise frustrate the intent of the drafters. 

Stay tuned.  .  .  . 

[Note:  For reference purposes Proposed Sections 2(a)-(c) are set forth below with the key, newly added text in bold]: 

Sec. 2. Validity and enforceability.

(a)  A written provision in .  .  .  a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title. 

(b) No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of–
(1) an employment, consumer, or franchise dispute; or
(2) a dispute arising under any statute intended to protect civil rights.

(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law. Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement. 

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