Coinbase, Inc. v. Suski, 602 U.S. ___ (2024) (“Coinbase II”), which the U.S. Supreme Court (“SCOTUS”) decided on May 23, 2024, was the last of the three arbitration-law cases SCOTUS heard and decided this 2023 Term. Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), recently interviewed University of North Texas-Dallas College of Law Professor Angela Downes; arbitrator, mediator, arbitration-law attorney, and former judge, Richard D. Faulkner; and the author about Coinbase II, and the other two cases, Bissonnette v. LePage Bakeries Park St., LLC, 601 U.S. 246 (2024), and Smith v. Spizzirri, 601 U.S. ___ (2024). (See posts here and interview here.) Russ also interviewed Angela, Rick, and the author about Coinbase II back when SCOTUS granted certiorari to hear it, an interview you can view here(see also post, here).
Coinbase II concerned the allocation of power between courts and arbitrators in a situation in which agreements with conflicting dispute-resolution provisions cover or appear to cover some or all of the same, disputed subject matter. The general principles and rules of arbitrability, as applied to the facts, did not clearly answer the question of who gets to decide whether the parties’ merits dispute was arbitrable, and so the Court created a new rule of arbitrability: “where. . . parties have agreed to two contracts—one sending arbitrability disputes to arbitration and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs.” Coinbase II, slip op. at 8. Applying the new rule to the facts, the Court concluded “that a court, not an arbitrator must decide whether the [Coinbase II] parties’ first agreement was superseded by their second.” Slip op. at 8.
Coinbase II: Background
Petitioner Coinbase, Inc. (“Coinbase”) is a cryptocurrency exchange platform Continue Reading »
Introduction: Assignment and the Separability Doctrine
Suppose A and B enter a contract imposing mutual obligations on them. The contract contains an arbitration agreement requiring arbitration of all disputes arising out of or related to the contract. The contract does not purport to prohibit assignment, and the parties’ rights under the contract are otherwise capable of assignment.
A assigns to assignee C its rights to receive performance under the contract. B commences an action against A under the contract and A demands arbitration. B resists arbitration, arguing that A has assigned to C its right to enforce the contract (we’ll call it a “container contract” because it contains an arbitration agreement) and thus there is no longer any arbitration agreement that A can enforce against B. Judgment for whom?
In Sanders v. Svannah Highway Auto Co., No. 28168, slip op. (July 26, 2023), the Supreme Court of North Carolina said that, under the Federal Arbitration Act’s “separability” doctrine, the claim that the contract—including the arbitration agreement— could no longer be enforced was an issue that concerned the enforceability of the container contract as a whole, not the enforceability of the arbitration agreement specifically. And because the assignment concerned only the continued existence of the container contract, and not a claim that the container contract was never formed, the exception to the separability doctrine under which courts get to decide whether a contract has been concluded did not apply.
Accordingly, explained the South Carolina Supreme Court, it was for the arbitrator to decide what effect, if any, the assignment had on A’s right to enforce the container contract, including the arbitration agreement. Continue Reading »
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
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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.”
Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.” 9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”
United States Supreme Court
InNew Prime Inc. v. Oliveira, 586 U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.
Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?
Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.
Background
Dispute between a trucker and a trucking company
New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.
The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.
The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of employment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.
The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.
The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] authority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.
In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.
The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope
The Broad Authority the FAA Confers on Courts does not Extend to All
Private Contracts
SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”
The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.
Section 1 and Section 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4
Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4
Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).
According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).
The FAA’s “Terms and Sequencing” Demonstrates that under Section 1 Courts Decide whether a Contract Falls Under the FAA
The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.
The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”
SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.
The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465 U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforceability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written maritime contract or a contract “evidencing a transaction involving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465 U. S. at 10–11, and n. 5).
The Trucking Company’s Delegation and Severability Arguments Put the Section 3 and Section 4 Cart before the Section 1 and Section 2 Horse
The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?
The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).
Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).
The trucking company argued that: (a) the
trucker did not “specifically challenge[] the parties’ delegation clause. . .”;
and, therefore, (b) the parties had to arbitrate their dispute over whether the
contract fell within Section 1’s exemption.
The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.
“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, explaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).
More to follow on New Prime…
But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior posts here, here, here, here, and here.
Photo Acknowledgments:
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.
The March 2010 issue of Alternatives to the High Cost of Litigation, the excellent newsletter of the International Institute for Conflict Prevention and Resolution(“CPR”), featured as its cover story an article I wrote on Rent-A-Center West v. Jackson, No. 09-497, and Granite Rock Co. v. Int’l Brotherhood of Teamsters, No. 08-1214, two of the three cases pending before the United States Supreme Court this term. The article is entitled “It’s Time for Doctrines: The Supreme Court Wrestles with ‘Severability’ and the ‘Clear and Unmistakable’ Standard.”
These two cases involve, to some degree, the Buckeye Check Cashing/Prima Paint doctrine of severability—a/k/a “separability.” Rent-A-Center also examines the “clear and unmistakable doctrine,” under which arbitrators can decide arbitrability questions if the parties clearly and unmistakably so agree.
Rent-a-Center, which arises under the Federal Arbitration Act,raises the question whether courts or arbitrators get to decide whether an arbitration agreement is unconscionable if the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. (See our prior posts here, here and here.) Granite Rock, which arises under Section 301 of the Labor Management Relations Act, concerns whether, on the facts presented, arbitration must go forward and what it should encompass. (See our prior post here.)
In the article I argue that both cases were wrongly decided by the Court of Appeals for the Ninth Circuit, and that, in Granite Rock, the Ninth Circuit reached the right result (an order compelling arbitration) for the wrong reasons. I predict that the United States Supreme Court will reverse the Rent-A-Center decision and vacate the Granite Rock decision.
Alternatives to the High Cost of Litigation is a subscription-only publication. Anyone interested in obtaining a copy of the article can request one at this page. Subscription information is available at that page, too, as well as publisher John Wiley & Sons, here.
I would like to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article. Russ is not only a keen, professional editor, but a pleasure to work with as well.
Professor Aaron Bruhl, an Assistant Professor of Law at the University of Houston Law Center, recently published in PrawfsBlawg a thought-provoking and insightful article on Rent-A-Center West v. Jackson (No. 09-497). (Post here) Regular readers no doubt remember that the United States Supreme Court recently granted certiorari in Rent-A-Center, and will be hearing argument on April 26, 2010. (See our prior posts here and here).
Professor Bruhl points out that, in addition to being of interest to those practicing employment, consumer or plain old arbitration law, Rent-A-Center “is just as interesting for those who study federal courts and judicial politics.” He reminds us that one of the few remaining “safety valves” for challenging arbitration agreements is unconscionability:
In the last few years, as other routes for challenging arbitration have been closed off, unconscionability has become a surprisingly common and surprisingly effective way of attacking arbitration agreements. The challenges do not attack arbitration per se – federal law favors arbitration – but instead target various aspects of a particular arbitration process: a given clause might forbid class arbitrations, bar punitive damages or otherwise restrict remedies, sharply curtail discovery, require a consumer to pay hefty arbitrator’s fees, etc. There have been many cases on these topics in recent years, and a good number of them sustain the challenge to the arbitration clause.
He notes that the United States Supreme Court has consistently denied certiorari in cases where lower courts have invalidated arbitration agreements on state-law unconscionability grounds and the question is whether the invalidation offended the Federal Arbitration Act. He suspects “the Court has avoided these cases because it feels ill-equipped to resolve whether a lower court is discriminating against arbitration:”
First, unconscionability analysis often requires a fact-intensive inquiry. Second, and more important, determining whether a lower court is using unconscionability differently when it comes to arbitration requires an engagement with the details of state law and a comparison of lots of prior unconscionability cases. Third, and maybe most important of all, a holding that the lower court is applying unconscionability unfairly, especially when the lower court says it is applying the same analysis it applies elsewhere, carries with it some serious expressive baggage. Essentially, it requires the Supreme Court to say that the lower court is being dishonest. That happens, but when it does so, it is a big deal (think cases like Bush v. Gore or the cases from the 50s/60s rejecting supposed procedural defaults in the state courts).
But the Court granted certiorari in Rent-A-Center, a case involving not the merits of a state law unconscionability challenge, but the question who gets to decide unconscionability when the parties clearly and unmistakably submit it to the arbitrators. Professor Bruhl believes certiorari was granted because addressing the “who” question, and resolving it in favor of arbitration, will cleanly dispose of the unconscionability problem from the standpoint of the federal courts, at least in cases where the parties clearly and unmistakably agreed to arbitrate arbitrability:
That doesn’t require diving into the weeds of state law and the record. If the Court assigns the issue to the arbitrator, that will be a very easy rule to monitor for compliance (unlike deciding whether the lower court applied unconscionability correctly). All of those unconscionability cases out there will instantly become not wrong but irrelevant – because courts won’t be deciding the issue anymore. And it won’t matter whether some lower courts can be trusted to apply unconscionability correctly, because they will be cut out of the picture. Continue Reading »
July 21st, 2009 Arbitrability, Authority of Arbitrators, Texas Supreme CourtComments Off on The Texas Supreme Court Says Court – Not Arbitrator — Gets to Decide Lack of Capacity Issue Notwithstanding the Severability Doctrine
Karl Bayer’s and Victoria VanBuren’s Texas-based Disputing blog recently reported on In re Morgan Stanley & Co., Inc., __ S.W.3d __ (Texas 2009) (No. 07-0665), in which the Texas Supreme Court held that whether a contracting party had the capacity to enter into a contract containing an arbitration agreement was for the court to decide, notwithstanding that, under the severability (a/k/a “separability”) doctrine, a challenge to the validity or enforceability of a contract as a whole, including the arbitration agreement, is generally for the arbitrators to decide under a broad arbitration clause. Ms. VanBuren did an excellent job summarizing the case and explaining its significance in her post, “Texas Supreme Court Holds that the Court, not the Arbitrator Should Decide the Issue of Capacity to Contract,” and we recommend that anyone interested in learning more about the case read her thoughtful and nicely-written post.
Morgan Stanley illustrates that the severability doctrine — first espoused by the United States Supreme Court in Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967)and later clarified in Buckeye Check Cashing v. Cardengna, 546 U.S. 440, 449 (2006) — is not without its limits. Severability is a legal fiction, which Courts apply for the purpose of determining whether arbitrators have the authority to determine certain disputes concerning the enforceability or validity of a contract containing an arbitration clause. It deems the arbitration clause to be an agreement which stands on its own footing from the contract in which it is contained. Continue Reading »
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