In Steyn v. CRTV, LLC (In re Steyn), 175 A.D. 3d 1 (1st Dep’t 2019), New York’s Appellate Division, First Department decided a case falling under the Federal Arbitration Act (the “FAA”) that involved two challenges: one to an award of attorney fees on manifest disregard of the law grounds, and the other to an award that a nonsignatory obtained by joining the petitioner’s counterclaim.
The Court rejected the manifest-disregard challenge to the attorney fee award in favor of a signatory to the arbitration agreement, but held that the trial court should have vacated the award made in favor of a nonsignatory (which included both damages and attorney fees).
Background: Attorney Fee and Arbitrability Challenges
The appeal arose out of a
contract “dispute between Mark Steyn, a renowned author and television and
radio personality, and CRTV, an online television network, currently known as
BlazeTV, which features conservative commentators such as Glenn Beck and Phil
Robertson.” 2019 N.Y. Slip Op. 5341, at *2. We’ll call Steyn the “Host” and
CRTV the “Network.”
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.)
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.”
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?
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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.
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.
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.”
What constitutes a “final arbitration award” for purposes of the Federal Arbitration Act is important because it bears on whether an award can be confirmed, vacated, or modified under Sections 9, 10, or 11 of the Federal Arbitration Act (the “FAA”). We addressed the basics concerning final awards in a 2009 post, here.
In Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018), the U.S. Court of Appeals for the Fourth Circuit was faced with the question whether an award (the “Appraisal Award”), convened under an agreement’s appraisal clause, and issued by three appraisers, was a final arbitration award under the FAA. The unusual procedural posture of the case raised an additional, related question: whether under the FAA an arbitration panel, convened under the arbitration provision of the parties’ agreement, had the authority to declare the Appraisal Award to be a final award. That question matters, for if an arbitration panel has that power, then its decision concerning finality is subject only to the very highly deferential review permitted by Section 10 of the FAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995); Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068-69 (2013).
Concededly with the benefit of 20/20 hindsight, we wonder whether a different litigation and appellate strategy might have yielded a different outcome. The Court held that the Appraisal Award was not final, and remanded the matter back to the appraisers. But the Court did not, for the reasons set forth below, definitively answer the “who” question. The Court’s decision that the Appraisal Award was not final was unquestionably correct if one considers from a purely objective standpoint, without deference to the Arbitration Award, which declared that the Award was final. But the correct outcome would be considerably less certain had the Railroad sought confirmation of the Arbitration Award and urged the Court to accord deference to the arbitrators who made it.
The dispute between Northfolk Southern Railway Co. (the “Railroad” or the “Appraisal Award Defending Party”) and Sprint Communications Co., L.P. (the “Carrier” or the “Appraisal Award Challenging Party”) arose out of a 25-year-term 1987 licensing agreement (the “Agreement”) under which the Carrier’s predecessor licensed from the Railroad’s predecessor the right to use for fiber-optics-cable purposes certain parts of the Railroad’s rights of way. The Carrier renewed that Agreement for an additional 25-year term (the “renewed Agreement term”), and a dispute arose about the renewal price. Continue Reading »
Panel’s Analysis of Whether it Had the Authority to Bind Nonsignatory Mr. Stapleton to the Lance Armstrong Arbitration Award (Panel Issue No. 2)
In Part III.B.2 we explained why we believe the Panel’s analysis of whether the parties agreed to arbitrate their dispute about sanctions (Panel Issue No. 1) was on the mark, and why the state court considering the issue de novo should find it helpful in the event the Armstrong parties challenge the panel’s jurisdiction. Today we briefly examine the Panel’s decision on Panel Issue No. 2: “Which parties are properly subject to this Tribunal’s jurisdiction?” (Award at 5)
The issue arose because the SCA Parties contended that Mr. William Stapleton was bound by the arbitration agreement and award because he executed the Settlement Agreement, albeit apparently only in his capacities as an officer of Tailwind and an authorized agent of Armstrong. (See Award at 7.)
Like Panel Issue No. 1—whether the parties agreed to arbitrate SCA’s sanctions claims—Panel Issue No. 2 is a question of arbitrability. SeeHowsam v. Dean Whitter Reynolds, Inc., 537 U.S. 79, 84 (2002); First Options of Chicago v. Kaplan, 514 U.S. 938, 941, 946-47 (1995). So, as discussed in Parts III.B.1 and III.B.2, the Court would presumably decide it independently—that is, without according deference to the Panel’s decision— were it necessary for it to decide it in the first place.
The SCA Parties, however, wisely chose to confirm the award as a whole rather than attempt to vacate it in part and confirm it in part, for as the Panel’s decision made very clear, there was no basis for finding Mr. Stapleton to be bound by the award. But even though the Court will presumably not have to address the issue, it is helpful for those interested in learning more about arbitration law to understand why the Panel got it right, and why the Texas Court would likely agree. Continue Reading »
On March 23, 2015 the U.S. Supreme Court granted certiorari in DIRECTV, Inc. v. Imburgia, No. 14-462. If decided on its merits, the case will be by our count the fifth U.S. Supreme Court decision concerning class arbitration decided on its merits during the period 2010 forward.
Imburgia is a decision by the California Court of Appeals, Second District, Division Oneof which the California Supreme Court denied review. Like many other Federal Arbitration Act cases, it presents some interesting vertical conflict of law questions, but the California Court of Appeals does not appear to have resolved them in the way the U.S. Supreme Court presumably intended them to be resolved under the Volt and Mastrobuono lines of cases.
The case centers on a class-action waiver non-severability provision included in a consumer contract DIRECTV entered into in 2007, about four years before the U.S. Supreme Court ruled in Concepcion that the Federal Arbitration Act preempted California’s DiscoverBank rule. The Discover Bank rule provides that class action waivers are unenforceable in litigation or arbitration proceedings. See, generally, AT&T Mobility LLC v.Concepcion, 131 S.Ct. 1740, 1753 (2011).
Before Concepcion not only did the California state courts hold that the Federal Arbitration Act did not preempt the Discover Bank rule, but so did the U.S. Court of Appeals for the Ninth Circuit. Thus, at the time, the risk companies like DIRECTV and others with consumer class arbitration exposure had was that applicable state law would not only ban class arbitration waivers, but applicable federal law would permit that to happen.
So companies like DIRECTV and others built into their arbitration agreements a fail-safe mechanism under which the entire arbitration agreement would be rendered uneneforceable if state law rendered the class arbitration waiver unenforceable. In other words, the companies understandably viewed class action litigation to be a more favorable alternative than class arbitration if forced to choose between the two. Continue Reading »
Panel Issue No. 1: the Armstrong Panel’s Authority to Decide the SCA Parties’ Sanctions Claims
Introduction
Part III.A of our Lance Armstrong Arbitration Award series identified (a) the categories of issues (the “Issue Categories”) that a court can address on a motion to vacate an arbitration award on the ground the arbitrators exceeded their powers (the “Issue Categories”); and (a) the four specific issues that the Panel addressed in its award (the “Panel Issues”).
Panel Issue No. 1 was, as phrased by the arbitrators: “Does this Arbitration Tribunal have the jurisdiction or authority to decide and resolve the existing disputes between the named parties?” That issue falls into Issue Category No. 1: Issues concerning whether the parties delegated to the arbitrators—or were required to delegate to the arbitrators—the power to decide particular disputes.
Whether or not the Panel had the authority to decide the SCA Parties’ claims against Armstrong and Tailwind (the “Armstrong Parties”) depends on whether at least one 0f the parties requested the arbitrators to adjudicate those claims; and the other party either: (a) expressly or impliedly consented to the arbitrators deciding the dispute; or (b) objected to the request, but the claims were within the scope of the parties’ written pre- or post-dispute arbitration agreement. Disputes what issues the parties submitted—or were required to be submit—to arbitration present questions of arbitrability. See, e.g.,Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-86 (2002); First Options of Chicago, Inc. v. Kaplan, 543 U.S. 938, 942-45 (1995).
Relationship Between Arbitrability and the Post-Award Standard of Judicial Review
Ordinarily, questions of arbitrability are— in the allocation-of-decision-making-power scheme of things—for the court to decide, unless the parties have clearly and unmistakably agreed to delegate them to arbitrators. See, e.g., First Options, 543 U.S. at 944-45. Under a typical broadly-worded pre-dispute arbitration agreement, the vast majority of disputes that may arise between the parties—including disputes about arbitration procedure—are presumptively arbitrable, that is, they are subject to arbitration unless the parties clearly a nd unmistakably exclude them from arbitration. But when a dispute presents a question of arbitrability, then it is presumptively for the court to decide, that is, they are not subject to arbitration unless the parties clearly and unmistakably include them within the universe of disputes that must be submitted to arbitration.
Where as here, an arbitrability issue arises at the award enforcement (or back-end) stage of the proceedings—rather than the pre-arbitration, arbitration-agreement-enforcement (or front-end) stage (i.e., on a motion to compel arbitration or stay litigation)—then whether or not an issue is a question of arbitrability affects the standard of review. The standard of review is, in essence, the degree of deference to which a court pays the arbitrators’ decisions on matters that are material to applications to confirm, vacate or modify arbitration awards. Continue Reading »
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