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Delegation Agreements, Separability, Schein II, and the October 2019 Edition of CPR Alternatives

November 12th, 2019 Appellate Practice, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Agreements, Arbitration Practice and Procedure, Arbitration Provider Rules, Clear and Unmistakable Rule, Contract Interpretation, Delegation Agreements, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Practice and Procedure, Separability, Severability, United States Court of Appeals for the Fifth Circuit, United States Supreme Court No Comments » By Philip J. Loree Jr.
Delegation Provision

There have been a number of important cases decided in 2019 concerning the application and effect of “delegation provisions”—clear and unmistakable agreements to arbitrate arbitrability issues. Delegation provisions, which we’ll refer to as “delegation agreements,” are not a recent phenomenon, and are quite common, especially in administered arbitration, where consent to applicable arbitration rules typically includes clear and unmistakable consent to arbitrate arbitrability. But there’s been a good deal of judicial controversy this year over whether delegation agreements should, in certain circumstances, be given the full force and effect that they deserve.  

We think that delegation provisions should ordinarily be enforced as written and according to their terms. When Courts interpret and apply delegation agreements, they should, consistent with Rent-a-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), consider those agreements to be separate and independent from the arbitration agreements in which they are contained.

Much of the controversy has centered on whether terms of the arbitration agreement should define or circumscribe the scope of the delegation agreement and even effectively negate it. Consequently, certain courts have conflated the question of who gets to decide whether an issue is arbitrable with the separate question of what the outcome of the arbitrability dispute should be, irrespective of who decides it. 

The SCOTUS Schein Decision and The Fifth Circuit’s Schein II Decision on Remand

The first significant delegation-agreement development this year came on

January 8, 2019, when 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., 139 S.Ct. 524, 528-31 (2019)

The arbitration agreement in Schein provided:

Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of Party B), shall be resolved by binding arbitration in accordance with the arbitration rules of the American ArbitrationAssociation [the “AAA”].

Party A commenced an action against Party B that sought, among other things, injunctive relief, which A said was outside the scope of the arbitration agreement. Party B said that A’s arbitrability argument had to be submitted to arbitration because the parties clearly and unmistakably delegated arbitrability questions to the arbitrator by incorporating AAA Commercial Arbitration Rules into their contract, including Rule 7 of those rules, which provided:

(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

The U.S. Court of Appeals for the Fifth Circuit did not decide whether the parties had clearly and unmistakably agreed to arbitrate arbitrability questions, but held that, assuming the parties entered into a delegation agreement, the arbitrability claim would not be arbitrable under the so-called “wholly groundless” exception adopted by certain U.S. Circuit Courts of Appeals. Under that exception to the enforceability of delegation agreements, courts were permitted to decide preemptively “wholly-groundless” arbitrability questions, even though the parties clearly and unmistakably agreed to submit those questions to an arbitrator.

The U.S. Supreme Court granted certiorari to decide whether the “wholly groundless” exception contravened the FAA. The Court held the answer was “yes.”

The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” 139 S. Ct. at 528, 531. “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.” 139 S. Ct. at 528, 531. The “wholly groundless” exception, explained 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.” 139 S. Ct. at 531.

Because the Fifth Circuit did not decide whether the parties had, in fact, clearly and unmistakably agreed to arbitrate arbitrability, the U.S. Supreme Court remanded the case to the Fifth Circuit so that the Court could determine that issue.

On remand, the Fifth Circuit observed that under prior circuit precedent, incorporating arbitrator provider rules that clearly and unmistakably require arbitration of arbitrability constitute clear and unmistakable evidence of an intent to arbitrate arbitrability.

But here, said the Fifth Circuit, the “placement of the [injunctive action] carve-out. . . is dispositive[,]” and “[w]e cannot rewrite the words of the contract.” “The most natural reading of the arbitration clause,” said the Court, is “that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules.”

That “plain language incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out.” Because of “that carve out,” said the Fifth Circuit, “we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.”

Accordingly, the Fifth Circuit held that the parties did not clearly and unmistakably agree to delegate arbitrability and affirmed the district court’s denial of the arbitration proponents’ motions to compel arbitration. We refer to the Fifth Circuit’s decision as Schein II. On August 28, 2019, the Schein II arbitration proponents moved for rehearing en banc.

Delegation Agreements: Our CPR Alternatives Article on Schein II

We recently published in the October 2019 edition of our favorite ADR trade press publication, Alternatives to The High Cost of Litigation (“Alternatives”) an article on Schein II, entitled Back to SCOTUS’s Schein: A Separability Analysis that Resolves the Problem with the Fifth Circuit’s Remand. Alternatives is the newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”) and is published by John Wiley & Sons, Inc.

CPR’s Alternatives is “an international newsletter covering cutting-edge dispute resolution trends[,] and “an authoritative guide for using ADR at companies, within law firms and in the courts.” Each monthly issue “focuses on new ADR developments, techniques and court practices.” (See CPR Website, here.)

The article discusses, among other things, how Schein II can be reasonably interpreted to mean either: (a) the parties did not clearly and unambiguously agree to arbitrate any arbitrability issues; or (b) the parties’ agreed to arbitrate only arbitrability disputes about matters that fall within the scope of the arbitration agreement. The first interpretation would negate the parties’ incorporation of AAA Commercial Rule 7.

The second interpretation would mean that the parties clearly and unmistakably agreed to arbitrate only questions that ask whether a matter that is at least arguably within the scope of the arbitration agreement— but is clearly outside the scope of the carve-out—is arbitrable. Because the presumption in favor of arbitrability deems such matters to be arbitrable as a matter of law, it would mean that the parties agreed to arbitrate only arbitrability questions that were not only relatively rare, but also legally uncontroversial.  

That makes little sense, and would render the parties’ incorporation of AAA Commercial Rule 7 to be of little or no practical significance or effect.    

The Article proposes a solution to the interpretative problem that a  Schein II-Type analysis creates, and under which Courts interpret arbitration- agreement terms as overriding or defining the scope of delegation agreements that are made part of those arbitration agreements. We argue that courts should use the analytical framework of the separability doctrine, espoused in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and applied to delegation agreements in Rent-a-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), and interpret delegation agreements  as being independent from the arbitration agreements in which they are contained, and not to engraft upon those delegation agreements scope limitations that are based on the terms of the arbitration agreements to which the delegation agreements relate.

We explain in detail in the article why using a separability-based analytical model has a number of advantages over the Schein II approach in that it gives full effect to the terms of the separate arbitration and delegation agreements, gives effect to the separate but related purposes that each of those agreements serves, and otherwise helps ensure that the parties’ legitimate contractual expectations are met.  

Two other cases we discussed this year— 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)—are similar to Schein II because they, at least to some degree, conflated the merits of the underlying arbitrability dispute with the separate question of whether the parties clearly and unmistakably agreed to arbitrate arbitrability disputes.

Both Courts determined that the parties did not clearly and unmistakably agree to submit to arbitration a particular, underlying arbitrability question because they believed that the answer to that underlying arbitrability question had to be that the matter was not arbitrable. So rather than focusing on the terms of the delegation agreement itself, the Courts focused on contractual provisions governing the merits of the arbitrability dispute, which were typically contained in the arbitration agreement, the parties’ main agreement, or both, and allowed their perception of the merits of the underlying arbitrability dispute to drive their determination of whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions. We blogged about the Bucsek case in the Loree Reinsurance and Arbitration Law Forum here, and about Bucsek and Lennox Crawford in CPR Speaks here and here.

Just as using a separability analysis to decide Schein II would have changed the outcome of that case, so too would it likely have changed the outcomes in Bucsek and Lennox Crawford. Irrespective of whether those different outcomes might have been desireable or undesireable, the analytical basis for reaching them would be much more consistent with other arbitrability of arbitrability cases, and easier to apply in future cases. Hard cases shouldn’t necessarily create bad law, but they often do.

How do I Obtain a Copy of the Alternatives Article?

While CPR members receive Alternatives as a membership perk, John Wiley & Sons makes copies of articles or issues available to members of the public on a read-only or download basis for a reasonable fee. If you would like to obtain a copy of our Schein II article, please visit the Wiley Online website here.

A Shout out to CPR Alternatives Editor Russ Bleemer

We’d like to take this opportunity to thank our good friend Russ Bleemer, the long-time editor of Alternatives, who did a great job editing and perfecting the article. We’ve written a number of articles for Alternatives over the last ten years or so, and Russ has played a key role in each. His keen editorial insights and skills, and his boundless interest in, and enthusiasm for, the subject matter, are invaluable.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.  


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