Introduction: Delegation Provisions and Modern Perfection
Delegation provisions clearly and unmistakably assign arbitrability determinations to arbitrators, which means they provide for arbitrators to decide arbitrability-related disputes.
Coinbase v. Suski, 602 U.S. 143 (2024) set forth the allocation of power between courts and arbitrators for four “orders” of arbitrability-related disputes:
- A “first order” dispute is “[a] contest over the merits of the dispute[,]” the determination of which “depends on the applicable law and relevant facts.” 602 U.S. at 148 (quotation omitted).
- A “second order dispute” concerns “whether [the parties] agreed to arbitrate the merits” of the first order dispute. 602 U.S. at 148 (quotation omitted).
- A “third order dispute” concerns “who should have the primary power to decide” a second order dispute.” 602 U.S. at 149.
- A “fourth order” dispute is one where there are “multiple agreements that conflict as to the third-order question of who decides arbitrability.” 602 U.S. at 149.
Coinbase held that fourth-order disputes are for the courts, which are to decide them based on “traditional contract principles.” 602 U.S. at 149.
In a recent U.S. Court of Appeals for the Fourth Circuit decision, Modern Perfection, LLC v. Bank of America, No. 23-1965, slip op. (4th Cir. Jan. 13, 2025), the Court was faced with what appeared to be a “fourth-order” dispute as defined by Suski. The question was who gets to decide arbitrability questions when one contract contained a broad arbitration agreement and a delegation provision and the other a clause that expressly contemplated judicial resolution of disputes.
The problem was that Suski was not decided until briefing in both the district court and the Fourth Circuit was complete, and the arbitration challengers’ argument centered on the scope of the delegation provisions, not on whether the contracts contemplating judicial resolution of disputes superseded the delegation provisions.
The Suski fourth-order dispute issue was first raised in a Fed. R. App. P. 28(j) letter the challenger submitted once Suski was decided. Because the argument had not been raised in the parties’ appellate briefs, the Court would not hear it, and ruled that, under the terms of the delegation provisions, the arbitrator gets to decide whether the dispute was arbitrable.
Background
Over a five-year period a bank issued to each of six plaintiffs two contracts. One was a deposit agreement that contained a a broad arbitration agreement, which in turn included a delegation provision. The arbitration agreements and their delegation provisions provided, in pertinent part:
The arbitrator, sitting alone without a jury, will decide questions of law and fact and will resolve the Claim. This includes the applicability of this Resolving Claims section and the validity of the deposit agreement, except that the arbitrator may not decide or resolve any Claim challenging the validity of the class action and jury trial waiver. The validity of the class action and jury trial waiver will be decided only by a judicial referee or a court.
Slip op. at 4 (emphasis in original).
The other contract the bank issued to each of the plaintiffs (the “arbitration challengers” or “challengers”) was a promissory note made for a federal Paycheck Protection Program (“PPP”) loan, which was made early on in the COVID-19 crisis. The promissory notes did not contain an arbitration agreement, and their “Choice of Law; Jurisdiction; Venue” clauses stated that the parties “agree and consent to be subject to the personal jurisdiction of any state or federal court located in” the state where the borrower had its principal place of business. Slip op. at 4. The clauses further provided “that trial shall only be conducted by a court in that state.” Slip op. at 4.
The plaintiff businesses brought suit in district court asserting fraud, breach-of-contract and other claims “based on the bank’s marketing and administration of its PPP loan program.” Slip op. at 4. The bank moved to compel arbitration, and prior to the SCOTUS Suski decision, the district court granted the motion, holding that the delegation provision required arbitration of the question whether the dispute concerning the promissory note was within the scope of the arbitration agreement in the deposit agreement. No Section 3 stay was requested, the district court dismissed the action, and the bank appealed. Briefing on the appeal was completed before Suski was decided. The Fourth Circuit affirmed the judgment of the district court.
The Court Declines to Apply Suski’s Rationale Because the the Arbitration Challengers did Not Argue the Promissory Notes’ Judicial Dispute Resolution Provisions Superseded or Narrowed the Deposit Agreements’ Delegation Provisions
Not having the benefit of the Suski decision, the arbitration challengers did not argue in the district court that this was a “fourth-order” dispute, the promissory note’s judicial dispute resolution provisions superseded the arbitration agreements and delegation provisions, and that accordingly the Court, not an arbitrator, acting pursuant to the delegation provisions, had to decide the arbitrability dispute.
After the parties filed their appellate briefs, SCOTUS handed down Suski, and the banks argued for the first time, by way of a FRAP 28(j) supplemental authorities letter, that “[t]his Court should undertake the requested [Suski-based] analysis to determine whether the Promissory Notes or the Deposit Agreements govern the parties’ disputes.” Slip op. at 6 (quotation omitted). The Court, however, held it would not “consider any fourth-order issues because the businesses never raised them in their briefs to this Court.” Slip op. at 6 (citation omitted).
“A fourth-order argument[,]” said the Court, “would have gone something like this: Even if the deposit agreements contain a valid and enforceable arbitration clause that would otherwise cover the current dispute, that does not matter because the promissory notes countermand any such agreement.” Slip op. at 6 (citation omitted). But the businesses contended that they did not agree to arbitrate the dispute concerning the PPP loans, which is a “second-order argument,” and, alternatively, the delegation provision was not sufficiently clear and unmistakable, which is a “third-order argument.” Slip op. at 6.
The arbitration challengers’ argument centered on the scope of the arbitration agreement and its delegation clause. They argued “that their claims fall outside the deposit agreements’ arbitration provision—not that the deposit agreements have been ‘superseded’ by the promissory notes.” Slip op. at 7. The Court noted that at oral argument the arbitration challengers could not specify how their argument would be different if the promissory notes had never been issued and the only contract was the deposit agreement containing the arbitration and delegation provisions. See slip op. at 7.
The Court explained that the difference between the argument the challengers made and that made in Suski was not merely “semantic[]” but “involve[d] the nature of” the challengers’ claim “and the basis on which they ask us to reverse the district court’s judgment.” Slip op. at 7. And while the Court did “not fault” the challengers from not “anticipat[ing] terminology the Supreme Court only later introduced in [Suski,]” it “rarely consider[s] arguments that were not raised in an appellant’s opening brief,” and the challengers did not argue that there was a basis to do so in this case. Slip op. at 7 (citation omitted).
Underscoring this conclusion was the challenger’s failure to respond in its reply brief to the bank’s opposition brief argument that the challengers “‘do not argue that the Promissory Note’s venue provision superseded or narrowed the Deposit Agreement’s arbitration provision.” While Suski had not yet been decided by this point, the bank referred in opposition brief to an argument that mirrored the one later decided in Suski, and the challengers did not quarrel with the bank’s assertion that the challengers did not make that argument.
The Court Rejects the Arguments that the Challengers Preserved for Appellate Review
After reviewing the general rules concerning delegation provisions (which we’ve addressed in other posts, see, e.g., here and here), the Court said the three issues properly before it were: (a) whether the delegation provision language was sufficiently “clear to delegate arbitrability questions to the arbitrator[,]” slip op. at 10; (b) whether the delegation provision “is unenforceable because “‘[the parties] never agreed to arbitrate claims arising out of the Promissory Notes[,]’” slip op. at 11 (quoting Challengers’ Br. at 42); and (c) whether the district court should have stayed the action under Section 3 of the FAA, slip op, at 13. The Court ruled against the challengers on each of these issues.
Whether the Delegation Provisions were Clear and Unmistakable
The Court determined that the delegation provision—which provided for arbitration of “the applicability of this Resolving Claims section and the validity of the deposit agreement. . . .”—was clear and unmistakable. The Court explained that both the U.S. Supreme Court in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), and the Fourth Circuit, had found similar delegation provisions to be clear and unmistakable. Slip op. at 10. In Rent-A-Center, the Supreme Court found to be clear and unmistakable a provision that said “the arbitrator ‘shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement.’” Slip op. at 10 (quoting Rent-A-Center, 561 U.S at 66. (Our good friend, colleague, and frequent co-author, Richard D. Faulkner, Esq. (see, here and here), drafted this language for Rent-A-Center many years ago, and years prior to the Rent-A-Center case.)
Likewise, the Fourth Circuit had “reached the same conclusion” concerning other delegation provisions, including ones that “tasked the arbitrators with resolving:”
- “‘all disputes, including the scope and validity of this Arbitration Provision,’” slip op. at 10 (quoting Hengle v. Treppa, 19 F.4th 324, 332 (4th Cir. 2021));
- “‘any issue concerning the validity, enforceability, or scope of this Agreement or this Agreement to Arbitrate,’” slip op. at 10-11 (quoting Gibbs v. Haynes Investments, LLC, 967 F.3d 332, 336-37 (4th Cir. 2020)); and
- “‘[a]ll disputes. . . relating in any way to the execution and delivery, construction or enforceability of this Agreement.’” Slip op. at 11 (quoting Minnieland Priv. Day Sch., Inc. v. Applied Underwriters Captive Risk Assurance Co., 867 F.3d 449, 452 (4th Cir. 2017)).
The Court said that these delegation provisions, including the Rent-A-Center provision, were “not meaningfully different” from the provision at issue in Modern Perfection. Cases in which the Fourth Circuit held that an alleged delegation provision was not sufficiently clear and unmistakable “involved ‘broad’ and ‘general’ clauses that contained no language giving arbitrators authority to determine the applicability or validity of the arbitration provisions.” Slip op. at 11 (quoting Carson v. Giant Food, Inc., 175 F.3d 325, 330 (4th Cir. 1999); citing Peabody Holding Co., LLC v. United Mine Workers of Am., Int’l Union, 665 F.3d 96, 103 (4th Cir. 2012).
Whether the Delegation Provisions were Unenforceable
The Court rejected the challengers’ argument that the delegation provisions were somehow “unenforceable because ‘they never agreed to arbitrate claims arising out of the Promissory Notes.’” Slip op. at 11-12 (quoting Challengers’ Br. at 42). This argument, however, was not one concerning validity or enforceability of the delegation provisions but related to the scope of those provisions. Slip op. at 11.
Rent-A-Center foreclosed that kind of argument. A party can challenge the validity of a delegation provision itself, and Courts get to decide those types of direct challenges. A challenger cannot defeat a delegation clause “by attacking ‘the rest of the agreement to arbitrate’ and instead must challenge ‘the validity of the delegation provision in particular.’” Slip op. at 12 (quoting Rent-A-Center, 561 U.S. at 71, 74).
While the a party may challenge the rest of the arbitration agreement on the same grounds on which it challenges the delegation provision, to invalidate the delegation provision the challenger “must assert—and ultimately prove—that there is some defect that ‘render[s] that provision” illegal or otherwise unenforceable.’” Slip op. at 12 (quoting Rent-A-Center, 561 U.S. at 74 (emphasis in original); citing Suski, 602 U.S. at 151 and Gibbs, 966 F.3d at 338). This rule applies whether or not the delegation agreement is part of a standalone arbitration agreement or part of an arbitration agreement that, in turn, is contained within the parties’ main contract. See slip op. at 12 (citations omitted).
The challengers’ argument failed because they did not contend that the delegation provision contained in the deposit agreement’s arbitration agreement was “itself unlawful or unenforceable.” Slip op. at 12-13 (citing Rent-A-Center, 561 U.S. at 74). Indeed, at oral argument they “could not identify any basis for challenging the validity of the delegation clause itself.” Slip op. at 13 (citing Oral Arg. 15:59-16:45).
Whether the District Court should have Stayed the Action Pending Arbitration
The district court also rejected the challengers’ argument that under Smith v. Spizzirri, 601 U.S. 472 (2024), the district court should have under 9 U.S.C. § 3 stayed, not dismissed, the matter. The Court rejected that argument because, agreeing with the Seventh Circuit’s decision in National Cas. Co. v. Continental Ins. Co., 121 F.4th 1151, 1153 (7th Cir. 2024), the Court held that under Spizzirri, a stay is mandatory only if the party seeking a stay requests it, and here nobody requested a stay. See slip op. at 13-14; see also 9 U.S.C. § 3; Spizzirri, 601 U.S. at 475-76.
We find it somewhat odd that the challengers appealed the district court’s dismissal of the case, claiming it should have been stayed, because a finding that a stay should have been granted would have required the Court to vacate and remand the dismissal order, and dismiss without prejudice as premature the appeal of the arbitrability issue. The challengers would then have been unable to pursue their appeal unless and until, at the earliest, the arbitrator determined that the parties were not required to arbitrate. But at that point the appeal would be moot. And if the arbitrator concluded that the parties were required to arbitrate, then the challengers presumably could not appeal until the arbitrator made a final award resolving all the issues submitted to arbitration. (See our Spizzirri post, discussing appellate jurisdiction implications of granting or not granting a stay.)
There may well have been good reasons why the challengers appealed the district court’s failure to grant a stay, but they are not apparent from the Court’s opinion.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094. PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
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