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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 No Comments »
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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