Should your business agree to arbitrate under arbitration provider rules? Well, that depends.
Ideally, you should review those rules to see what they say, and discuss them with a knowledgeable and experienced arbitration attorney, or perhaps with another businessperson who has meaningful experience arbitrating under them. If, after doing your due diligence, you’re satisfied with the rules, understand how they might materially affect your arbitration experience, and are prepared to accept the consequences, then you may want to agree. If not, then you need to consider other options.
Granted, most of us do not bother to review arbitration rules before agreeing to arbitrate, or even to consult briefly with someone who is familiar with how they work in practice. And that can lead to some surprises, some of which may be unpleasant.
Here’s a nonexclusive list of a few things to keep in mind when considering whether to agree to arbitrate under arbitration provider rules:
Agreeing to arbitrate under arbitration rules generally makes those rules part of your agreement, which means they are binding on you like any other part of your arbitration agreement;
Arbitration provider rules generally provide that “arbitrability” issues—i.e., issues about the validity, enforceability, or scope of the arbitration agreement—must be decided by the arbitrator, not the court;
They will govern not only the procedures to be used in the arbitration, but key substantive issues, such as arbitrator selection, arbitrator qualifications, and the number of arbitrators;
They may empower the arbitration provider to resolve, at least in the first instance, questions about arbitrator impartiality, questions that one would otherwise reasonably expect were within the exclusive province of a court;
They may determine whether your arbitration is placed on an expedited or complex-case track; and
They may contain information about arbitration provider fees, which may be steeper than you anticipated.
And this list is by no means comprehensive.
Do any of these things really matter in business arbitration? They do, and to take but a single example, let’s look at how agreeing to provider rules may result in your business forefeiting its right to have a court decide disputes about the validity, enforceability, or scope of the arbitration agreement.
Steps and columns on the portico of the United States Supreme Court in Washington, DC.
If you’ve been following our posts on Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw) (“Schein I”), and the U.S. Court of Appeals for the Fifth Circuit decision on remand, Archer and White Sales Inc. v. Henry Schein Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/2P9FGMU) (“Schein II”), then you know that the arbitration proponent, Henry Schein, Inc. (“Schein”), petitioned for rehearing en banc. (See here, here, here, and here.)
Well, unfortunately, the Fifth Circuit denied that petition on December 6, 2019. But apparently Schein was at least as disappointed with that ruling as we were, and so Schein filed on January 30, 2020 a petition for certiorari, asking the U.S. Supreme Court to review the Fifth Circuit’s Schein II ruling. A copy of the Petition is here.
We were delighted—not because we get to write still more articles and posts about Schein I and Schein II, but because, with all due respect to the Fifth Circuit, we think that Schein II was wrongly decided, and that consequently, Schein has been denied the benefit of the arbitration agreement and Delegation Agreement for which it freely bargained. And we hope that the U.S. Supreme Court grants Schein’s petition, reverses the Fifth Circuit decision, and directs the Fifth Circuit to compel arbitration of the parties’ arbitrability dispute as required by the parties’ Delegation Agreement.
On February 19, 2020, our friends at CPR Speaks, the blog of the International Institute for Conflict Prevention and Resolution (“CPR”), published a post we authored about this development, entitled Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court, which you can review here.
The post discusses the background of Schein I and Schein II, the events leading up to the petition for certiorari, some of the reasons why we believe Schein II was wrongly decided, and how we believe that it should be decided if SCOTUS grants the petition.
Many thanks to our good friend, Russ Bleemer—a New York attorney who is the editor of CPR’s Alternatives, an international ADR newsletter published by John Wiley & Sons, Inc., for his very helpful edits. And a shout-out also to CPR’s Tania Zamorsky, who, among other things, is the blog master of CPR Speaks.
About the Author
Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 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 a former partner of the litigation departments of the New York City firms of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP).
Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.
Today we’re going to focus on Section 3 of the Federal Arbitration Act, which authorizes a Court to stay litigation.
In the last segment of this series we answered the following FAQs about how gateway disputes are decided by courts and arbitrators:
What is the Presumption of Arbitrability?
Does the Presumption of Arbitrability Apply to all Questions of Arbitrability?
What Law Applies to Determine Gateway Disputes about Arbitrability to which the Presumption of Arbitrability does not Apply?
How is the Presumption of Arbitrability Applied to Resolve Gateway Questions about the Scope of an Arbitration Agreement?
What Defenses, if any, Can Parties Assert against Enforcement of an Arbitration Agreement, and what Law Governs these Defenses?
The answers to these questions, along with those provided in prior segments, were designed to provide you with a solid foundation for understanding how pre-award Federal Arbitration Act litigation works and what to expect if your business is or becomes embroiled in it.
The segment of which this post is Part I answers FAQs about the nuts and bolts of pre-award Federal Arbitration Act practice and procedure under Sections 2, 3, and 4 of the Act, the Sections that address gateway disputes about whether arbitration should proceed.
In this Part I we address the following FAQs, which focus on Section 3 stays of litigation:
What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?
How does Section 3 Work in Practice?
Future parts of this segment will address questions concerning Section 4 of the Federal Arbitration Act, which authorizes courts to compel arbitration. And we’ll move forward from there.
What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?
Section 2, as we’ve said, is the enforcement command of the Federal Arbitration Act, which deems all arbitration agreements falling within its scope to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. (See here and here.) Section 2 requires, as a matter of federal law, that arbitration agreements falling within its scope are to be enforced to the same extent as contracts generally. (See here.)
But the Federal Arbitration Act does more than require the enforcement of arbitration agreements by putting them on “an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and citations omitted). It provides for specific performance of arbitration agreements, both in the form of an order staying litigation of an arbitrable controversy under Section 3 of the FAA, and an order directing a party to proceed with arbitration in accordance with their agreement. 9 U.S.C. §§ 3 & 4.
This third instalment of the Businessperson’s Federal Arbitration Act FAQ Guide concerns pre-award litigation under the Federal Arbitration Act (the “FAA” or the “Federal Arbitration Act”) and focuses on so-called “gateway” disputes about whether arbitration should proceed.
What is the Difference between Pre-Award and Post-Award Litigation under the Federal Arbitration Act?
The Federal Arbitration Act contains certain remedial provisions that are designed to address specific problems that arise before an arbitrator or arbitration panel makes a final award on matters submitted (or allegedly submitted) to arbitration. The litigation these provisions authorize is “pre-award” FAA litigation. Other provisions of the Federal Arbitration Act apply only to arbitration awards. The litigation those other provisions authorize is “post-award” FAA litigation.
Sections 3, 4, 5, and 7 of the FAA, concerning stays of litigation in favor of arbitration, motions to compel arbitration, the appointment of arbitrators, and the enforcement of subpoenas issued by arbitrators. They therefore pertain to pre-award FAA litigation.
Section 8 allows a party to invoke the Court’s admiralty jurisdiction “by libel and seizure of the vessel or other property of the other party. . . ,” and subsequently to obtain an order directing parties to proceed to arbitration, with the court “retain[ing] jurisdiction to enter its decree upon the award. . . .” Section 8 thus authorizes both pre-award and post-award relief, albeit only in cases falling under the admiralty jurisdiction.
Sections 9, 10, 11, 12, and 13, which concern motions to confirm, vacate, or modify awards, pertain to post-award FAA litigation.
What are Gateway Questions?
A “gateway” question is one which “determine[s] whether the underlying controversy will proceed to arbitration on the merits.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Disputes raising gateway questions arise when one party fails or refuses to proceed to arbitration or asserts that it is not required to proceed to arbitration on the merits.
For example, suppose A and B, parties to a contract containing an FAA-governed arbitration agreement find themselves embroiled in a dispute. A thinks the arbitration agreement does not require it to submit the dispute to arbitration but B disagrees.
A accordingly commences litigation in a federal district court, which has subject matter jurisdiction because the parties are citizens of different states and the amount of A claim against B exceeds $75,000, exclusive of interest and costs.
B moves the court under FAA Section 3 to stay litigation in favor of arbitration, and under Section 4 to compel arbitration. 9 U.S.C. §§ 3 & 4.
The dispute between A and B over whether B is required to arbitrate the dispute presents a gateway question because it will determine whether A’s and B’s dispute on the merits will proceed to arbitration.
Who Decides Gateway Questions?
Some gateway questions are for the courts, with the answer determining whether the Court directs the parties to proceed to arbitration on the merits. Other gateway questions are for the for the arbitrator (or arbitration panel), and the Court simply directs the parties to submit their gateway question to arbitration, the arbitrator decides the question, and, if the answer to the gateway question is that arbitration on the merits may proceed, then the arbitrator decides the merits.
Whether or not a court or an arbitrator decides a particular gateway question depends on whether or not the question is a “question of arbitrability.”
The term “question of arbitrability” is a term of art. The Federal Arbitration Act embodies and implements a federal policy in favor of arbitration, applicable in both state and federal courts. See, e.g., Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 501 (2012). But arbitration’s “first principle” is that arbitration is “strictly a matter of consent,” Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415-16 (2019) (citation and quotations omitted), and “a party cannot be required to submit to submit to arbitration any dispute which he has not agreed so to submit.” Steelworkers v. Warrior Gulf Nav. Co., 363 U.S. 574, 582 (1960); see also First Options of Chicago v. Kaplan, 543 U.S. 938, 942-943 (1995); Howsam, 537 U.S. at 83.
Courts presume that the question “whether the parties have submitted a particular dispute to arbitration” to be a “question of arbitrability,” which is for the Court to decide unless the parties “clearly and unmistakably” agree otherwise. Howsam, 537 U.S. at 83 (quotations and citations omitted).
This, however, is an “interpretive rule” that is narrower than might first appear. Howsam, 537 U.S. at 83. The Supreme Court has said “[l]inguistically speaking, one might call any potentially dispositive gateway question a “question of arbitrability,” but “for purposes of applying the interpretive rule, the phrase ‘question of arbitrability’ has a far more limited scope.” Howsam, 537 U.S. at 83.
The term “question of arbitrability” is “applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well have not agreed to arbitrate.” Howsam, 537 U.S. at 83-84.
Questions of arbitrability thus turn on whether: (a) the dispute is legally capable of resolution by arbitration; (b) the scope of an arbitration agreement, that is, whether the parties agreed to arbitrate particular controversy or type of controversy; (c) 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 (d) whether an arbitration agreement has been formed or concluded, that is, whether an arbitration agreement exists in the first place. See Howsam, 537 U.S. at 84 (citing examples and cases); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 530 (2019) (“To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”); Compucredit Corp. v. Greenwood, 565 U.S. 95, 104 (2012) (finding federal statutory claims arbitrable “[b]ecause the [statute] is silent on whether claims under the [statute] can proceed in an arbitra[l] forum, [and accordingly] the FAA requires the arbitration agreement to be enforced according to its terms”); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 296-97, 299, 303 (2010) (“[O]ur precedents hold that courts should order arbitration of a dispute only where the court is satisfied that neither the formation of the parties’ arbitration agreement nor (absent a valid provision specifically committing such disputes to an arbitrator) its enforceability or applicability to the dispute is in issue.”)
But not every question about what a party agreed to arbitrate is, within Howsam’s interpretive rule, a “question of arbitrability” presumptively for the court to decide. The term “question of arbitrability” is “not applicable in other kinds of general circumstance where parties would likely expect that an arbitrator would decide the gateway matter.” Howsam, 537 U.S. at 84 (emphasis in original).
One such “general circumstance” concerns “procedural questions which grow out of the dispute and bear on its final disposition,” which are “presumptively not for the judge, but for an arbitrator, to decide.” Howsam, 537 U.S. at 84 (emphasis in original) (quotations and citation omitted). Likewise, “allegation[s] of waiver, delay and like defenses to arbitrability[,]” are presumptively for the arbitrator. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Howsam, 537 U.S. at 84.
Gateway questions concerning conditions precedent and other “prerequisites” to arbitration, “such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate” are also presumptively for arbitrators, not courts. See Howsam, 537 U.S. at 84-85 (emphasis deleted; quotations omitted) (quoting Revised Uniform Arbitration Act of 2000 (“RUAA”) § 6(c), and comment 2, 7 U.L.A. 12-13 (Supp. 2002)).
While Howsam distinguishes between “questions of arbitrability” and questions which are not questions of arbitrability, sometimes courts distinguish between “issues of “substantive arbitrability,” which are presumptively for the Court, and “issues of procedural arbitrability,” which are presumptively for the arbitrators to decide. See Howsam, 537 U.S. at 85 (quoting RUAA § 6, comment 2, 7 U.L.A. 13) (quotations omitted).
How do Parties Clearly and Unmistakably Agree to Submit Questions of Arbitrability to Arbitrators?
The presumption that courts get to decide arbitrability questions can be rebutted if the parties clearly and unmistakably submitted (or agreed to submit) those questions to arbitrators. See First Options, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). As a practical matter that means the party seeking to arbitrate an arbitrability question must show that the parties: (a) unambiguously agreed to submit questions of arbitrability (or questions concerning the arbitrators’ “jurisdiction”) to the arbitrators; or (b) during an arbitration unreservedly submitted to the arbitrator an arbitrability question to arbitration. See First Options, 543 U.S. at 944-46.
Unreservedly submitting a question to the arbitrator means that both parties argue the merits of the arbitrability question to the arbitrator without either party informing the arbitrator that it believes it did not agree to submit the arbitrability question to the arbitrator and that any decision the arbitrator makes on that issue will be subject to independent (non-deferential) review by a court on a motion to vacate the award. First Options, 543 U.S. at 944-46.
Suppose the Court has compelled Parties A and B from our earlier hypothetical to arbitrate their breach of contract claim, which arises out of B’s alleged breach of Contract 1. During the arbitration Party A requests that the arbitrator determine whether Party B breached not only Contract 1, but a different contract, Contract 2, which does not contain an arbitration agreement. B argues to the arbitrator that it did not agree to arbitrate A’s claim for alleged breach of Contract 2, and that, in any event, it did not agree to arbitrate arbitrability questions, which are for the Court to decide.
Under those facts, Party A did not unreservedly submit to the arbitrator arbitrability questions because it argued that the arbitrator did not have the authority to decide arbitrability questions. If the arbitrator decides that Party A agreed to arbitrate claims arising out of A’s breach of Contract 2, then Party A should be entitled to independent (non-deferential) review of the arbitrability question by the Court on a motion to vacate the arbitration award. See First Options, 543 U.S. at 944-46.
That said, A would have been well-advised not only to argue that the arbitrator had no authority to resolve arbitrability questions, but to explicitly advise the arbitrator in writing that all of its arguments concerning the arbitrability of the Contract 2 breach claim, and the arbitrator’s power to decide arbitrability questions, were made under a full reservation of A’s rights to obtain independent, judicial review of those questions.
Now suppose the same basic scenario, except that A does not argue that the arbitrator has no authority to decide arbitrability questions, and clearly and unmistakably represents to the arbitrator that it is submitting the merits of the arbitrability question for a final and binding determination by the arbitrator, without reservation of any right it might otherwise have to independent judicial review of that question. Under that scenario, A will have unreservedly submitted the arbitrability question to arbitration and will not be entitled to independent review upon a timely motion to vacate the award.
Agreements to arbitrate arbitrability questions are often referred to as “Delegation Provisions” or “Delegation Agreements.” (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, here, and here.)
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.
Are there any Arbitrability Disputes that Courts Decide when the Contract at Issue Clearly and Unmistakably Provides for the Arbitrator to Decide Questions of Arbitrability?
Yes. But to understand why, when, and to what extent that is so, we need to understand that: (a) typically a clear and unmistakable Delegation Agreement or Delegation Provision is part of the parties’ arbitration agreement; (b) the arbitration agreement, and the Delegation Agreement it contains, is also, in turn, ordinarily part of a larger agreement; and (c) the Federal Arbitration Act doctrine of “separability” requires Courts to consider each of those three agreements as separate and independent from the other two. See Rent-A-Center v. Jackson, 561 U.S. 63, 70-75 (2010) Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 448-49 (2006); Prima Paint v. Flood Conklin, 388 U.S. 395, 403-04, 406-07 (1967).
Within this “separability” framework, Courts always decide whether a Delegation Agreement was formed and exists. See Henry Schein, 139 S. Ct. at 530.
Ordinarily, that does not present problems from the standpoint of the separability doctrine. For example, suppose A signs a contract under which B undertakes to perform services for A. The contract contains an arbitration agreement as well as a Delegation Agreement. But the contract is signed by C, purportedly as agent for B, not by B itself. As it turns out, B never authorized C to sign the contract on its behalf, and C did not have apparent or inherent authority to sign for B.
B (understandably) does not perform the contract, and A demands arbitration against B. B refuses to arbitrate, contending that it never entered into the contract because C was not authorized to act on B’s behalf.
A then brings an action in court seeking to compel B to arbitrate, B asserts it is not obligated to arbitrate because it never agreed to do so, and A contends that, in any event, the Court must compel arbitration of the issue whether the contract exists because of the Delegation Agreement in the contract C signed. B counters that just as it never agreed to the arbitration agreement, so too, it never agreed to the Delegation Agreement.
In this hypothetical, B wins—the Court would determine whether C was authorized to act on behalf of B, and would presumably conclude that A and B never entered into a contract, let alone an arbitration or Delegation Agreement.
Courts also decide whether a Delegation Agreement is valid, but only when the challenge to the Delegation Agreement relates specifically to the Delegation Agreement itself, not just the contract containing the arbitration and Delegation Agreements, and not just the arbitration agreement containing the Delegation Agreement. See Rent-a-Center, 561 U.S. at 70-75.
Suppose C was authorized to act on behalf of B, but further suppose that C made fraudulent representations to A about B’s qualifications, experience, and ability to perform the services that B undertook to perform for A. A entered into the contract, reasonably and justifiably relying on C’s false representations, which were made on behalf B.
A discovers the fraud and sues B, seeking rescission of the contract. A demands arbitration but B says it is not required to arbitrate because if A prevails on the rescission claim, then it means the arbitration and Delegation Agreements will also be rescinded, and the arbitrator’s conclusion will demonstrate that she had no authority to decide the matter in the first place.
This time A wins. Under the doctrine of separability the contract itself is separate from its arbitration and delegation agreements. SeeBuckeye Check Cashing, 546 U.S. at 448-49; Prima Paint, 388 U.S. at 403-04, 406-07. Because the alleged fraud does not specifically relate to the arbitration agreement, and because the arbitration agreement is at least arguably broad enough to encompass the fraud claim, the Court will direct the parties to arbitrate the rescission claim. See 546 U.S. at 448-49; 388 U.S. at 406-07.
Now let’s change the facts yet again. This time A demands arbitration against B and B resists arbitration on the ground that the arbitration agreement is unconscionable on state law grounds because it limits the number of depositions that may be taken. A counters that the unconscionability claim directed at the arbitration agreement is a question of arbitrability that, under the Delegation Agreement, must be submitted to the arbitrator for decision. B does not contend that the Delegation Agreement itself is unconscionable because the arbitration agreement limits deposition discovery.
A wins again. Under the doctrine of separability the Delegation Agreement is separate from the arbitration agreement and, consequently, a challenge to the validity of the arbitration clause, which does not specifically relate to the delegation agreement, does not affect the parties’ obligations to arbitrate arbitrability. See Rent-a-Center, 561 U.S. at 70-75.
While the arbitration agreement limits deposition discovery, B did not (and probably could not) demonstrate that the arbitration agreement’s limits on deposition discovery would provide an independent basis for finding the Delegation Agreement unconscionable. To show that the unconscionability argument was specifically directed at the Delegation Agreement, B would have had to demonstrate not only that the limits on deposition discovery applied to arbitrability determinations made under the Delegation Agreements, but that it was unconscionable for A to have required B to agree to allow the arbitrator to make arbitrability determinations with only limited deposition discovery. See Rent-a-Center, 561 U.S. at 71-75.
It is one thing to argue that such a limitation on deposition discovery might be unconscionable in an agreement to arbitrate factbound disputes on the merits, but it is another to argue that the same principle applies equally to a agreement to arbitrate arbitrability disputes, which courts commonly decide without the need for deposition discovery. See Rent-a-Center, 561 U.S. at 71-75.
More to come….
In Part II of “Gateway Disputes about Whether Arbitration Should Proceed” we will begin by addressing the question, “What is the presumption of arbitrability?”
Please note. . .
This guide, including the instalments that will follow in later posts, and prior instalments, is not designed to be a comprehensive recitation of the rules and principles of arbitration law. It is designed simply to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face and how engaging a skilled, trustworthy, and experienced arbitration attorney can help them confront those challenges more effectively.
This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they voluntarily elect to do so.
If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should contact an experienced and skilled attorney with a solid background in arbitration law.
About the Author
Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitrations and litigations.
Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and frequently serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.
Loree & Loree was recently selected by Expertise.com out of a group of 1,763 persons or firms reviewed to be one of Expertise.com’s top 18 “Arbitrators & Mediators” in New York City for 2019, and now for 2020. (See here and here.)
You can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.
Photo Acknowledgment
The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.
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
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.”
Whether Class-Arbitration Consent is a Question of Arbitrability?
In Stolt-Nielsenand Oxford the parties voluntarily submitted the class-arbitration-consent question to arbitrators because a four-Justice plurality ruled in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), that the class-arbitration-consent issue was not a question of arbitrability for the court to decide. While “courts assume that the parties intended courts, not arbitrators” to decide certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” the Court found that the issue did not fall into “this narrow exception.” 539 U.S. at 452 (citations omitted). According to the Court, “the relevant question . . . is what kind of arbitration proceeding the parties agreed to:”
That question does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question. Given these considerations, along with the arbitration contracts’ sweeping language concerning the scope of the questions committed to arbitration, this matter of contract interpretation should be for the arbitrator, not the courts, to decide.
539 U.S. at 452-53 (citations omitted).
Bazzle was well received by the lower courts, and even though it was only a plurality opinion, many courts, parties and practitioners apparently thought that the arbitrability of consent-to-class-arbitration was a foregone conclusion after Bazzle even though the plurality’s rationale was endorsed by only four justices – a hat-tip to Associate Justice Stephen G. Breyer’s clearly and persuasively written plurality opinion. Some also apparently thought that Associate Justice John Paul Stevens’ concurring opinion was, for all intents and purposes, an endorsement of the plurality’s rationale, and that accordingly, Bazzle established precedent binding on the lower courts.
In 2003, prompted in part by Bazzle, the American Arbitration Association promulgated its Supplementary Rules for Class Arbitrations, Rule 3 of which directs the arbitrator or panel to “determine as a threshold matter, in a reasoned, partial, final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class. . . .” AAA Supplementary Rules, Rule 3. The “Clause Construction” awards in Stolt-Nielsen and Oxford were made under Rule 3 of the AAA Supplementary Rules.
In light of Bazzle and the AAA Supplementary Rules, class-arbitration-consent-related disputes in cases where the relevant arbitration agreements did not expressly prohibit class arbitration – e.g., cases not involving class-arbitration waivers – were generally submitted to arbitration, usually pursuant to the AAA Supplementary Rules. Most of the class-arbitration-related litigation concerned challenges to class arbitration waivers, rather than the arbitrability of class-arbitration-consent-related issues.
But Stolt-Nielsen explained that Bazzle did not establish binding precedent on any issue—including class-arbitration-consent arbitrability—because it “did not yield a majority decision. . . .” See Stolt-Nielsen, 130 S. Ct. at 1772. The Court said that “[u]nfortunately the opinions in Bazzle appear to have baffled the parties in this case at the time of the arbitration proceeding[,]” because “[f]or one thing, the parties appear to have believed that the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration.” Stolt-Nielsen, 130 S. Ct. at 1772 (citation omitted). The Court did “not revisit that [allocation of decision-making power] question [in Stolt-Nielsen] because the parties’ supplemental agreement expressly assigned this issue to the arbitration panel, and no party argues that this assignment was impermissible.” Id.
The Court underscored that same point in Oxford, noting that it “would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability,’” an issue “Stolt-Nielsen made clear that [the Supreme Court] has not yet decided. . . .” Oxford, Slip op. at 4 n.2. But Oxford gave the Court “no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.” Id. Oxford submitted the issue to arbitration “not once but twice—and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.” Id. Continue Reading »
Today we are pleased and honored to feature an article by our good friend John (Jay) McCauley, a distinguished arbitrator, mediator, attorney and professor of arbitration law. Jay’s article is entitled “A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson,” and can be found here.
Jay debunks the media hype surrounding the United States Supreme Court’s recent decision in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010), and argues (persuasively) that the case is a reasonable, natural and modest interpretation of the Court’s prior Federal Arbitration Actjurisprudence. With one minor caveat we agree wholeheartedly with his insightful and pragmatic view of the case.
Our view of the decision may differ very slightly in that we believe that its scope is broader than the holding might suggest. Jay is absolutely correct when he says that the decision permits parties to challenge delegation agreements (agreements to arbitrate arbitrability) on unconscionability grounds. He says that there may be “dozens” of grounds on which to make such a challenge, and we think he is right about that, too.
But we think that it will be very difficult to mount a successful challenge specifically directed at a delegation agreement. And if we are right about that, then the practical effect of the decision will be that delegation agreements will usually be enforced, enabling arbitrators to decide most unconscionability challenges. The scope of the decision is, in our view, therefore quite broad.
We nevertheless agree with Jay that the decision makes perfect sense in light of the Court’s prior Federal Arbitration Act jurisprudence, and apart from our caveat about the decision’s scope, we are otherwise on the same page as Jay. Of course, it may turn out that challenges to delegation agreements prove more successful than we think they will.
Attorney Advertising Notice: Prior results do not guarantee a similar outcome.
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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.
