Parties can, and frequently do, agree to include in their contract a so-called “Delegation Provision” that clearly and unmistakably delegates to the arbitrators questions of arbitrability. (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, here, andhere.) Questions of arbitrability include questions concerning: (a) the scope of an arbitration agreement, that is, whether the parties agreed to arbitrate particular disputes or categories of disputes; (b) the validity or enforceability of an arbitration agreement “upon upon such grounds as exist at law or in equity for the revocation of any contract[,]” 9 U.S.C. § 2; or (c) whether an arbitration agreement has been formed or concluded, that is, whether an arbitration agreement exists in the first place. (See Loree Reinsurance and Arbitration Law Forum post here.)
Typically, a “delegation provision” states in clear and
unmistakable terms that arbitrability questions are to be decided by the
arbitrators. For example, by making part of their contract Rule 8.1 of the 2018
version of the International
Institute for Conflict Prevention and Resolution (CPR)’s Non-administered
Arbitration Rules, parties agree to the following broad Delegation
Provision:
Rule 8: Challenges to the Jurisdiction of the Tribunal
8.1 The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. This authority extends to jurisdictional challenges with respect to both the subject matter of the dispute and the parties to the arbitration.
Who Gets to Decide whether the Parties Entered into a Delegation Provision?
Suppose that Agent A, without the knowledge and consent of Party A, purports to bind Party A to a written contract with Party B, which includes a broad arbitration agreement that expressly incorporates by reference, and makes part of the purported contract, the 2018 version of CPR’s Non-administered Arbitration Rules. Party B and Agent A deal with each other concerning the subject matter of the contract, and a dispute arises.
Party B demands arbitration of the dispute, and serves an arbitration demand on Party A, who is understandably surprised at being named a party in an arbitration proceeding concerning a purported agreement of which it had no knowledge, objects to the arbitration demand, and Party B commences an action to compel arbitration.
In the proceeding to compel arbitration, Party A argues that
Agent A had no actual or apparent authority to bind it to the agreement that
contained the arbitration agreement. Party B responds that because the
Delegation Clause made part of the agreement requires arbitration of issues
concerning the “existence” of the arbitration agreement, Party A must arbitrate
the issue of whether Agent A had authority to bind it to the agreement.
Must Party A arbitrate the issue whether Agent A had authority to bind it to the agreement because the agreement contains a Delegation Provision? If the only consideration were the text of Rule 8.1, then the answer would be “yes.”
Suppose arbitrators decide an issue within the scope of their authority but do so in manifest disregard the parties’ contract. Do they exceed their authority by making an award that has not even a barely colorable basis in the parties’ contract or in applicable law?
The answer to that question, is, of course, “yes,” and over the years we’ve discussed in a number of posts how arbitrators can exceed their powers under Federal Arbitration Act Section 10(a)(4) or Section 301 of the Labor Management Relations Act by making awards in manifest disregard of the parties’ agreement. (See Loree Reinsurance and Arbitration Law Forum Posts here, here, here, here, here, here,here, here, and here.) As discussed in those posts, the U.S. Supreme Court has on multiple occasions ruled that commercial and labor arbitrators can exceed their powers by making an award that manifestly disregards—or does not “draw its essence” from—the parties’ agreement. SeeStolt-Nielsen S.A. v. AnimalFeeds Int’l Inc., 130 S.Ct. 1758, 1768-70 (2010); Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2067, 2068 (2013); Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000); Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599 (1960); Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987).
In our April 12, 2019 post (here) we reviewed how it is that the limited review powers courts have to vacate commercial and labor arbitration awards are designed to provide a limited, but very important, safety net to protect parties against egregious, material violations of arbitration agreements. Without that limited protection, the risks associated with agreeing to arbitrate would be intolerably high and parties would be much less apt to opt for arbitration over court litigation.
Courts vacate arbitration awards where arbitrators act outside the scope of their authority by ruling on issues that the parties did not agree to submit to them. That’s what happened in Brock Indus. Servs., LLC v. Laborers’ Int’l Union., __ F.3d ___, No. 17-2597, slip op. (7th Cir. April 8, 2019), which we discussed in our April 12, 2019 post here.
But to obtain vacatur of an award based on manifest disregard of the agreement, however, an award challenger must satisfy an exceedingly demanding standard. We’ve addressed the parameters of that standard in a number of other posts. (See, e.g., here, here, here, here, here, here,here, here, and here. Our blog has also tried to give a feel for how Courts apply (or are supposed to apply) the standard by comparing the U.S. Supreme Court decision in Stolt-Nielsen, which held that an award should be vacated for manifest disregard of the agreement, to the Supreme Court decision in Oxford, which held that an award should not be vacated under that manifest disregard standard. (See Loree Reinsurance and Arbitration Law Forum posts here, here, and here.) And from time-to-time we’ve reported on other cases that have applied the standard.
While challenges to awards based on manifest disregard of
the agreement are not uncommon, a very large majority of those challenges are
either virtually certain to fail or at least highly unlikely to succeed. It is
a relatively small universe of remaining, close cases that pose the biggest
challenges for parties and courts.
Today we’ll look at one of those close cases, which was decided by the Eighth Circuit Court of Appeals and explain why the case failed to satisfy the demanding standard, even though, at least at first glance, it may be difficult to square the arbitration award with the parties’ agreement.
Introduction: Arbitration as a Way to Resolve those Disputes—and Only those Disputes—Parties Submit to Arbitrators
The “first principle” of labor and commercial arbitration law is that “arbitration is a matter of consent, not coercion” —put differently, arbitration “is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.”Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted);First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (citations omitted); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986). That first principle is integrally intertwined with “the central or primary purpose of the [Federal Arbitration Act (“FAA”)][,]” which is “to ensure that private agreements to arbitrate are enforced according to their terms.”Stolt-Nielsen, 559 U.S. at 679 (citations and quotations omitted).
What happens if the parties agree to submit one category of disputes to a two-person arbitration panel and to submit another category of disputes to a three-person panel?
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 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.
I am told “papalote” is a Spanish word meaning “kite” or “hang glider.” It also appears in the name of a party to a recent decision of the U.S. Court of Appeals for the Fifth Circuit concerning narrow arbitration clauses, Papalote Creek II, L.L.C. v. Lower Colo. River Auth., No. 17-50852, slip op. (5th Cir. Mar. 15, 2019) (“Papalote II”). The party was Papalote Creek II, L.L.C. (“Papalote”). It won the appeal.
What was the appeal about? Narrow arbitration clauses, and in particular whether a dispute about maximum, aggregate liability under a wind-energy purchase and sale contract was a dispute “with respect to performance” within the meaning of the parties’ narrow arbitration clause.
The appeal was not the first, but the second, and the procedural history was tangled, both in terms of what transpired in the disputed arbitration and in the district court. The first appeal, Papalote I, resulted in a remand because at the time the district court compelled arbitration, the district court lacked subject matter jurisdiction. The issue on which the arbitration proponent sought arbitration was not ripe, even though it became ripe during the time Papalote I was pending. SeeLower Colo. River Auth. v. Papalote Creek II, L.L.C., 858 F.3d 916 (5th Cir. 2017) (“Papalote I”).
By the time Papalote I was decided, the arbitration panel had ruled against Papalote, the arbitration opponent. But Papalote I obligated the district court to vacate the arbitration award and to reconsider the issue of whether arbitration should be compelled under the narrow arbitration clause.
On remand the district court adhered to its previous decision that the dispute fell within the scope of the narrow arbitration clause, which resulted in another order to compel arbitration and the second appeal, Papalote II.
On the second appeal the Fifth Circuit reversed the district court’s decision on arbitrability, ruling that the dispute was not about “performance,” but about “interpretation.” Going forward that means that the parties will either have to settle their dispute or litigate it in court, even though they’ve both no doubt already spent not only a good deal of time, but money, litigating about arbitration, and arbitrating a dispute they did not mutually consent to arbitrate. (Perhaps for Papalote that’s not necessarily a bad outcome, but it’s just speculation on our part.)
Bottom line: Irrespective of whether the parties considered the potential consequences associated with their narrow arbitration clause, at least one of them (and perhaps even both) may, at least to some extent, now feel like they’re up that proverbial creek without a paddle—or even a papalote….
This post takes a closer look at Papalote II, focusing exclusively on the issue whether the dispute fell within or without the scope of the parties’ narrow arbitration clause.
Narrow Arbitration Clauses: Papalote II Background
In Papalote II the Fifth Circuit held that a narrow arbitration clause that covered disputes about the “performance” of a contract did not cover a dispute concerning the meaning of an aggregate liability provision in a wind-energy contract. That dispute, said the Court, concerned the interpretation of the contract, not its performance, and therefore the arbitration opponent was not required to submit it to arbitration.
Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.” 9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”
United States Supreme Court
InNew Prime Inc. v. Oliveira, 586 U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.
Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?
Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.
Background
Dispute between a trucker and a trucking company
New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.
The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.
The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of employment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.
The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.
The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] authority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.
In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.
The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope
The Broad Authority the FAA Confers on Courts does not Extend to All
Private Contracts
SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”
The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.
Section 1 and Section 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4
Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4
Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).
According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).
The FAA’s “Terms and Sequencing” Demonstrates that under Section 1 Courts Decide whether a Contract Falls Under the FAA
The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.
The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”
SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.
The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465 U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforceability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written maritime contract or a contract “evidencing a transaction involving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465 U. S. at 10–11, and n. 5).
The Trucking Company’s Delegation and Severability Arguments Put the Section 3 and Section 4 Cart before the Section 1 and Section 2 Horse
The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?
The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).
Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).
The trucking company argued that: (a) the
trucker did not “specifically challenge[] the parties’ delegation clause. . .”;
and, therefore, (b) the parties had to arbitrate their dispute over whether the
contract fell within Section 1’s exemption.
The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.
“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, explaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).
More to follow on New Prime…
But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior 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.
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, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)
But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?
On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).
The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.
Facts and Procedural History
Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.
Favorable arbitration awards are wonderful things, but they are not self-enforcing. Sometimes the other side voluntarily complies, but if not, there is really not much of anything the arbitrator can do to help.
Arbitrators are not judges and do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions, and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards, and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation or arbitration, an arbitration award stands on the same footing as any other privately prepared legal document, and for all intents and purposes it is a contract made for the parties by their joint agent of sorts—the arbitrator or arbitration panel. It may be intended by the arbitrator or panel, and at least one of the parties, to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement.
A judgment, by contrast, is an official decree by a governmental body (the court) that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a statutory lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
Confirming Arbitration Awards 2
The Federal Arbitration Act, and most or all state arbitration statutes, provide for enforcement of arbitration awards through a procedure by which a party may request a court to enter judgment on the award, that is to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
Chapter One of The Federal Arbitration Act (the “FAA”), and most or all state arbitration statutes, authorize courts to confirm domestic awards in summary proceedings. State arbitration-law rules, procedures, limitation periods, and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA). And Chapter 2 of the FAA provides some different rules that apply to the confirmation of domestic arbitration awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”), and the enforcement of non-domestic arbitration awards falling under the Convention (i.e., awards made in territory of a country that is a signatory to the Convention.
But let’s keep things simple, and take a brief look at the FAA’s requirements for confirming arbitration awards, as applicable in federal court for domestic awards not falling under Chapter Two of the Federal Arbitration Act in situations where there is no prior pending action related to the arbitration, and there are no issues concerning federal subject-matter jurisdiction, personal jurisdiction, sufficiency or service of process, venue (i.e., whether the suit should have been brought in a different federal judicial district), or the applicability of Chapter One of the FAA (9 U.S.C. §§ 1-16). We’ll also discuss how applications to confirm are supposed to be summary proceedings, why timing of an application is important, and how courts decide them.
What are the Requirements for Confirming Arbitration Awards under the Federal Arbitration Act?
Confirming Arbitration Awards 3
Like most other issues arising under the FAA, whether a court should confirm an award depends on what the parties agreed. Section 9 of the FAA, which governs confirmation of awards, says—with bracketed lettering added, and in pertinent part: “[A] If the parties in their agreement have [B] agreed that a judgment of the court shall be entered upon [C] the award made pursuant to the arbitration, and [D] shall specify the court, then [E] at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and [F] thereupon the court must grant such an order unless [G] the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9 U.S.C. § 9. Items [A] through [D] above each concern party consent as evidenced by the parties’ arbitration agreement.
The key substantive requirements for confirming arbitration awards are thus: Continue Reading »
We have discussed (here) what constitutes a final award under the Federal Arbitration Act, an issue that is important for a host of reasons, but is particularly so to any business faced with an adverse clause construction award. A clause construction award is an interim or partial final arbitration ruling that determines the threshold issue of whether the parties consented to class arbitration.
But not all arbitrations – even class arbitrations – are governed by the Federal Arbitration Act (“FAA”), and even when they are, parties may agree to procedural rules that are different from those of the FAA. See Preston v. Ferrer, 128 S.Ct. 978, 987-89 (2008); Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 478-79 (1989). In Maplebear, Inc. v. Busick, ___ Cal. App.5th ___, slip op. (Cal. App., 1st Dist. August 21, 2018) (certified for publication), the parties agreed that “the arbitration would be conducted by JAMS under its rules and procedures; the arbitrator would apply California substantive law; the arbitrator had no ‘power or authority to commit errors of law or legal reasoning’; and ‘[a]ny action to review the arbitration award for legal error or to have it confirmed, corrected or vacated’ would be decided under California law by ‘a California state court of competent jurisdiction.’” Slip op. at 2.
At issue in Maplebear was whether the California courts had jurisdiction to vacate a partial final Clause Construction Award, which concluded that the parties had consented to class arbitration. The California Appeals Court said “no,” which means that—unless the California Supreme Court (or the U.S. Supreme Court) hears an appeal and says otherwise—the parties have to endure through an entire class arbitration procedure before there is any judicial review of the Clause Construction Award. (Whether or not review by the California Supreme Court or the U.S. Supreme Court is even possible given the procedural posture of this case is outside the scope of this post.)
An Unfair Burden on the Clause Construction Award Challenger?
Clause Construction Award 2
Consider the burden the decision imposes on the class-arbitration opponent. According to the majority opinion in Concepcion, then fairly current American Arbitration Association statistics showed that: (a) “[a]s of September 2009, the AAA had opened 283 class arbitrations[;]” (b) “[o]f those, 121 remained active, and 162 had been settled, withdrawn, or dismissed[;]” (c) “[n]ot a single one, however, had resulted in a final award on the merits[;]” and (d) “[f]or those cases that were no longer active, the median time from filing to settlement, withdrawal, or dismissal—not judgment on the merits—was 583 days, and the mean was 630 days.” AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1751 (2011).
Clause Construction Award 4
While we have not researched whether more recent statistics tell a different story, it seems quite likely that the Court’s decision on finality means that the class arbitration opponent will have to spend an awful lot of time and money before the issue of class arbitration consent is reviewed by a court, assuming it is ever reviewed.
In prior posts we’ve discussed how footnote 2 of the U.S. Supreme Court’s decision in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2072 n.2 (2013) said it was an open issue whether class-arbitration-consent presented a question of arbitrability, and how certain U.S. Circuit Courts of Appeals have, subsequent to Oxford, held that consent-to-class-arbitration presents a question of arbitrability, which is ordinarily for the court to decide. (See, e.g., here.)
We have also discussed how, under First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995), even though questions of arbitrability are ordinarily for the court to decide, parties may clearly and unmistakably agree to submit questions of arbitrability to the arbitrators. In Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010), the Supreme Court of the United States referred to such agreements as “delegation provisions.” Id.
Class-Arbitration-Consent 2
In Spirit Airlines, Inc. v. Maizes, ___ F.3d ___, slip op. (11th Cir. August 15, 2018), the United States Court of Appeals for the Eleventh Circuit addressed a question that called in to play these two related concepts: “whether the [parties’] agreement’s choice of American Arbitration Association rules, standing alone, is clear and unmistakable evidence that [the parties] intended that the arbitrator decide” the consent-to-class-arbitration question. Slip op. at 2. The Court said the answer to that question was “yes.”
Attorney Advertising Notice: Prior results do not guarantee a similar outcome.
Please see also the information and links set forth on each footer page of the The Loree Law Firm website of which this blog is a part (http://www.loreelawfirm.com), and in the disclaimer that appears in the bottom right corner of each post page of this blog.
Disclaimer:
The content of this blog is not intended to be legal advice and should not be construed as such.
The views expressed in this blog are solely those of the author and do not necessarily reflect
those of The Loree Law Firm or any of its current or former clients.
