Introduction: Presumption of Arbitrability
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The presumption of arbitrability—grounded in the federal policy in favor of arbitration—is an important but sometimes misunderstood rule of Labor-Management-Relations-Act (“LMRA”)- and Federal-Arbitration-Act (“FAA”) arbitration law.
According to the presumption, “where. . . parties concede that they have agreed to arbitrate some matters pursuant to an arbitration clause, the law’s permissive policies in respect to arbitration counsel that any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration.” Granite Rock Co. v. Teamsters, 561 U.S. 287, 298-99 (2010) (citations and quotations omitted).
There is an understandable tendency among decision makers and commentators to interpret the presumption broadly, sometimes more broadly than the United States Supreme Court (“SCOTUS”)’s pronouncements warrant. But the presumption is not an overarching command that courts decide arbitration-law disputes in a way that yields arbitration-friendly outcomes. The presumption is, as SCOTUS explained in Granite Rock—and more recently, in Morgan v. Sundance, Inc., 142 S. Ct. 1708, 1713 (2022)—simply a limited-use tool to assist Courts in resolving ambiguities in arbitration agreements.
The presumption is, SCOTUS has said, “merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” Morgan, 142 S. Ct. at 1713 (quoting Granite Rock, 561 U.S. at 302). “The [federal] policy [in favor of arbitration[,]” SCOTUS said, “is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’” Morgan, 142 S. Ct. at 1713 (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, n. 12 (1967)).
The policy—and the presumption implementing it— merely requires courts to “hold a party to its arbitration contract just as the court would to any other kind.” Morgan, 142 S. Ct. at 1713. Courts, Morgan said, cannot “devise novel rules to favor arbitration over litigation.” Morgan, 142 S. Ct. at 1713 (quotation omitted). For “[t]he federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Morgan, 142 S. Ct. at 1713-14 (citation omitted).
Granite Rock and Morgan express SCOTUS’s intention to narrowly limit the application of the presumption of arbitrability and to prohibit its use as an extracontractual basis for justifying enforcement of arbitration agreements more vigorously or expansively than ordinary contracts. (See here (Arbitration Law Forum, 2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb? (July 18, 2022)).) Rather SCOTUS precedent treats it as a default rule of last resort for resolving scope ambiguities in arbitration agreements. See Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1418-19 (2019) (Not applying contra proferentem rule to resolve arbitration-agreement-scope ambiguities “is consistent with a long line of cases holding that the FAA provides the default rule for resolving. . . [such] ambiguities. . . .”) (citations omitted).
A recent, per curiam decision of the U.S. Court of Appeals for Second Circuit decision evidences the Second Circuit’s clear intention to follow SCOTUS’s presumption-of-arbitrability guidance and shows how it applies to the question before the Second Circuit in that case: At what point in the interpretative framework for determining arbitrability questions does the presumption of arbitrability come into play? See Local Union 97, Int’l Bhd. Of Elec. Workers, AFL-CIO v. Niagara Mohawk Power Corp., ___ F.4d ___, No. 21-2443-cv, slip op. (2d Cir. May 3, 2023) (per curiam).
Niagara Mohawk explains, among other things, that the presumption of arbitrability is a rule of last resort. Courts have no business resolving in favor of arbitration any doubts about the scope of arbitrable issue unless and until the Court has determined that the parties’ arbitration agreement is ambiguous as to whether the dispute is arbitrable. And even if there is an ambiguity, and the presumption applies, the presumption may be rebutted.
The Niagara Mohawk Decision
Niagara Mohawk “clarif[ied] the law of . . . [the Second] Circuit regarding disputes about the interpretation of arbitration clauses in collective bargaining agreements.” Slip op. at 3. Senior Circuit Judges Pierre N. Leval and Denny Chin, and Circuit Judge Eunice C. Lee, sat on the panel that issued the per curiam opinion.
Principally at issue was whether the collective bargaining agreement (the “CBA”) provided for arbitration of a grievance concerning retiree medical benefits that was brought in the name of an employee and Union business representative on behalf of certain retired persons. The retired persons were both former employees and former members of the Union.
The district court, relying on the presumption of arbitrability, determined the grievance was arbitrable, and the Second Circuit affirmed that decision. But the Second Circuit did so for materially different reasons.
Presumption of Arbitrability: The Second Circuit Affirms the District Court’s Arbitrability Ruling But Not the District Court’s Reasoning
The Second Circuit found that the Court should not have applied the presumption of arbitrability because the grievance fell within the scope of the agreement. See slip op. at 22-23. It held that the district court had erred by classifying the arbitration clause in the CBA as “broad” and then applying the presumption. See slip op. at 16-19, 22-23.
The district court should have first determined whether the grievance fell, or at least arguably fell, within the scope of the arbitration agreement. See slip op. at 17, 18-19.
The scope of the arbitration agreement was “not ambiguous as to the parties’ dispute,” and there was therefore no “need . . . [to] apply the presumption of arbitrability or decide whether that presumption, if it applied, has been rebutted.” Mohawk, slip op. at 22 (citing Granite Rock, 561 U.S. at 301 & n.8). Had the Court concluded that the the CBA did not even arguably cover the grievance, then the result would have been the same: it would have been improper to apply the presumption.
The Second Circuit also explained that the presumption of arbitrability is under Granite Rock supposed to be the “last,” not the “first[,] resort” for resolving questions concerning an arbitration agreement’s scope. To that end, Granite Rock “warned that courts should not ‘use policy considerations as a substitute for party agreement[,]’” Niagara Mohawk, slip op. at 11 (quoting Granite Rock, 561 U.S. at 303), and that “to presume . . . a dispute is arbitrable because an arbitration clause is framed broadly runs the risk of requiring parties to arbitrate disputes they did not consent to be arbitrated.” Niagara Mohawk, slip op. at 13-14 (citing Granite Rock, 561 U.S. at 298-99).
The Second Circuit added that the “presumption. . . is rebuttable and ‘simply assists in resolving arbitrability disputes.’” Niagara Mohawk, slip op. at 11 (quoting Granite Rock, 561 U.S. at 302). But the district court erred by ruling that the presumption could be rebutted only by showing that the parties expressly excluded the dispute from the scope of the agreement. See slip op. at 17-18.
The Second Circuit’s ruling on presumption rebuttal is supported not only by SCOTUS authority, but by logic and commonsense: If the parties’ arbitration agreement unambiguously excluded the grievance or dispute at issue from arbitration then there would be no occasion to apply the presumption in the first place, let alone to rebut it. An arbitration agreement that clearly excludes a dispute from coverage is, by definition, unambiguous. And the presumption applies only when an arbitration agreement is ambiguous.
The Second Circuit Declares No Longer Good Law its Pre-Granite Rock, Two–Part Framework to Determine Arbitrability Questions
The Second Circuit’s clarification of the framework to be applied to decide arbitrability disputes resulted in the Court concluding that its pre-Granite Rock two-part test for determining arbitrability disputes did not comport with Granite Rock.
The Presumption and the Second Circuit’s Two-Part Framework
Under that pre-Granite Rock test, district courts were required first to determine whether the arbitration clause was broad or narrow. Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F3d 218, 224 (2d Cir. 2001); JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 172 (2d Cir. 2004). Clauses that required “arbitration [of] all disputes arising out of a contract” were deemed to be “broad” while those that “limit[ed] arbitration to specific types of disputes[]” were deemed “narrow.” Oldroyd v. Elmira Savings Bank, FSB, 134 F.3d 72, 76 (2d Cir. 1998) (citing McDonnell Douglas Fin. Corp. v. Penn. Power & Light, 858 F.2d 825, 832 (2d Cir. 1988), abrogated on other grounds, Katz v. Cellco P’ship, 794 F.3d 341 (2d Cir. 2015); accord Louis Dreyfus, 252 F.3d at 224.
The test required district courts next to use the broad versus narrow classification to determine whether to apply the presumption of arbitrability. “Where,” the Court explained, “the arbitration clause is narrow, a collateral matter will generally be ruled beyond its purview.” Louis Dreyfus, 252 F.3d at 224 (citation omitted). But “[w]here the arbitration clause is broad, there arises a presumption of arbitrability and arbitration of even a collateral matter will be ordered if the claim alleged implicates issues of contract construction or the parties’ rights and obligations under it.” Louis Dreyfus, 252 F.3d at 224 (citation and quotations omitted).
A finding that an arbitration clause was “broad” would therefore trigger the presumption of arbitrability and, at least in most cases, result in a finding the dispute was arbitrable.
The Presumption According to the Granite Rock Framework
Thirteen years ago in Granite Rock, SCOTUS set forth the “the proper framework for deciding when disputes are arbitrable.” 561 U.S. at 297. This framework was different from the one the two-part framework the Second Circuit had developed prior to Granite Rock.
Granite Rock’s linchpin was that “a court may order arbitration of a particular dispute only” if it “is satisfied that the parties agreed to arbitrate that dispute.” 561 U.S. at 297 (citations omitted; emphasis in original).
That is so because of arbitration’s “first principle”— “arbitration is a matter of contract[,] . . . . arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration.” 561 U.S. at 296 (citation and quotations omitted) & 299 (citations omitted).
“Granite Rock”—said the Second Circuit in Niagara Mohawk—“at bottom” “stands for the proposition that courts may invoke a presumption of arbitrability only where the parties’ dispute concerns a valid and enforceable agreement to arbitrate that is ambiguous as to its scope.” Niagara Mohawk, slip op. at 11-12 (emphasis added).
Granite Rock, the Second Circuit explained, therefore “abrogated some elements of [the Second Circuit’s] previous arbitrability jurisprudence[,]” namely, its “two-step framework for determining whether a district court should compel arbitration. . . .” Niagara Mohawk, slip op. at 12.
Noting that the Second Circuit’s “previous arbitrability jurisprudence” “rests on the principle that arbitration is a matter of consent,” those cases, the Second Circuit said, are nevertheless, “inconsistent with Granite Rock to the extent they direct courts to prioritize deciding whether a presumption of arbitrability applies before determining whether, under ordinary, state-law principles of contract interpretation, a particular dispute is covered by the language to which the parties agreed.” Niagara Mohawk, slip op. at 13; see also 561 U.S. at 296-97 (citations omitted) (generally applicable state contract law governs question whether parties consented to arbitrate a specific dispute).
The Second Circuit declared that, to the extent prior cases employing the two-part test described above were inconsistent with Granite Rock, those cases “cannot be good law.” Slip op. at 14-15. (The Niagara Mohawk opinion discusses specific examples of the Second Circuit’s post-Granite Rock arbitrability jurisprudence. See slip op. at 14-15 & nn. 3-4.)
The Niagara Mohawk Decision Applies to both Labor Arbitration under the LMRA and Commercial Arbitration Governed by the FAA
Niagara Mohawk concerned a labor arbitration falling under the LMRA rather than one falling under Section 2 of the FAA. Technically, therefore, it might not be considered binding authority entitled to stare decisis effect in a matter involving an FAA arbitrability question. But we do not believe the Second Circuit would likely hold that it applies to labor disputes only and not to FAA-governed arbitration.
Niagara Mohawk relied heavily on Granite Rock, which in turn cited both LMRA and FAA cases to support its holding. In footnote six of the Granite Rock opinion, SCOTUS explained that it “discuss[ed] precedents applying the FAA because they employ the same rules of arbitrability that govern labor cases[,]” and because “the rule that arbitration is strictly a matter of consent—and thus that courts must typically decide any questions concerning the formation or scope of an arbitration agreement before ordering parties to comply with it—is the cornerstone of the framework the Court announced in the Steelworkers Trilogy for deciding arbitrability disputes in LMRA cases.” 561 U.S. at 299 n.6.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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