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The Businessperson’s Federal Arbitration Act FAQ Guide III: Pre-Award Federal Arbitration Act Litigation – Gateway Questions about Whether Arbitration Should Proceed (Part I)

January 29th, 2020 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Businessperson's FAQ Guide to the Federal Arbitration Act, Clear and Unmistakable Rule, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Fraud, Nuts & Bolts, Nuts & Bolts: Arbitration, Rescission and Reformation, Separability, Severability 3 Comments »
Arbitration Law | Gateway Questions | Arbitrability

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.

While the notion of agreeing to arbitrate arbitrability questions may seem odd to the uninitiated (which is why the clear and unmistakable requirement exists in the first place), such agreements are not uncommon. For example, an unambiguous agreement to arbitrate according to an arbitration-provider’s rules that clearly provide for arbitration of arbitrability questions generally will satisfy the clear and unmistakable requirement.  See, e.g., Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1245-46 (10th Cir. 2018); Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir.2005); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir.1989). The rules of leading arbitration providers provide that arbitrators decide such questions. See, e.g., American Arbitration Association, Commercial Rules and Mediation Procedures, Including Procedures for Large, Complex Commercial Disputes, R. 7(a); JAMS Comprehensive Arbitration Rules and Procedures, R 11(c); International Institute for Conflict Prevention & Resolution (“CPR”) 2007 Non-Administered Arbitration Rules, R. 8.

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 hereherehere, and here.)

Typically, a “Delegation Provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. For example, by making part of their contract Rule 8.1 of the 2018 version of the International Institute for Conflict Prevention and Resolution (CPR)’s Non-administered Arbitration Rules, parties agree to the following broad Delegation Provision:

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.

CPR Non-Administered Arbitration Rule 8.1 (2018) (emphasis added).

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. See Buckeye 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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Oxford Health Plans LLC v. Sutter—SCOTUS Reaffirms FAA Section 10(a)(4) Manifest Disregard of the Agreement Outcome Review Standard and Elaborates on Its Scope: Part II.C

August 19th, 2013 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Practice and Procedure, Unconscionability, United States Supreme Court Comments Off on Oxford Health Plans LLC v. Sutter—SCOTUS Reaffirms FAA Section 10(a)(4) Manifest Disregard of the Agreement Outcome Review Standard and Elaborates on Its Scope: Part II.C

Part II.C

Does Oxford Portend Judicial Reconsideration of

Whether Class-Arbitration Consent is a Question of Arbitrability?      

In Stolt-Nielsen and 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 »

SCOTUS Decides AT&T Mobility LLC v. Concepcion!

April 27th, 2011 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on SCOTUS Decides AT&T Mobility LLC v. Concepcion!

This morning the United States Supreme Court handed down its long-awaited decision in AT&T Mobility LLC v. Concepcion, No. 09-893, slip op. (April 27, 2011).  The Court held that the Federal Arbitration Act preempts California’s Discover Bank rule, which deems unconscionable class waivers in adhesive contracts under certain circumstances, because it “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.  .  .  .'”  Slip op. at 18 (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).  (The majority, concurring and dissenting opinions are here.)    

Associate Justice Antonin Scalia wrote the majority opinion, joined by Chief Justice John G. Roberts and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr.  Justice Thomas wrote a concurring opinion and Associate Justice Stephen G. Breyer dissented, joined by Associate Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.  

Stay tuned for more….

AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

December 10th, 2010 Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility, LLC v. Concepcion: What Would Cousin Vinny Have to Say About The Ninth Circuit’s Interpretation of the Equal Footing Principle?

One of my favorite scenes from the movie My Cousin Vinny (1992) is Vincent Laguardia Gambini’s (a/k/a “Vinny’s”) opening statement in the criminal trial of his cousin and cousin’s friend, both of whom were arrested and mistakenly charged for murder and robbery while driving through Alabama.  Vinny (played by Joe Pesci) — a native New Yorker who is as out of place in a rural Alabama courtroom as I suppose anyone could be — dozes off during the prosecution’s opening statement only to be jarred awake by his cousin — who is facing the death penalty — so that he can deliver an opening statement.  He saunters over to the jury, and says, gesturing at the prosecutor, “Everything that guy just said is bull$#!+.  Thank you.”  Then he returns to the defense table.  (Watch the scene here, which begins approximately three minutes and 33 seconds into the clip.)     Continue Reading »

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part II

Introduction

Part I of this two-part post (here) briefly discussed the background of  AT&T Mobility LLC v. Concepcion, No. 09-893, a case pending before the United States Supreme Court that will be argued on November 9, 2010.  We now delve into the details of the preemption questions before the Court and take a guess at the outcome. 

Federal Arbitration Act Preemption

The Federal Arbitration Act does not preempt all state law applicable to arbitration agreements, but it expressly preempts state law that conflicts with Section 2, and impliedly preempts all state law that “stands as an obstacle to the accomplishment and execution of the full purposes of Congress”  embodied in the Federal Arbitration Act.  See Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 988 (9th Cir. 2007) (citations and quotation omitted). 

Does Section 2 of the Federal Arbitration Act Expressly Preempt the Discover Bank Rule?

Section 2 of the Federal Arbitration Act declares that arbitration agreements within its scope “shall 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.  Section 2 establishes substantive federal law that expressly preempts all conflicting state law, except for state law that permits “the revocation of any contract” or governs the formation, interpretation, or construction of contracts generally. 

The exception to federal preemption is exceedingly narrow, for it saves from preemption only state laws that apply equally across the board to all contracts.  The United States Supreme Court summarized it well when it said:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.  What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause.  The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act’s language and Congress’s intent.

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (citations and quotations omitted; emphasis in original).   Continue Reading »

AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

September 30th, 2010 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on AT&T Mobility LLC v. Concepcion: What is the Scope of Federal Preemption in Class Waiver Cases?

Part I

Introduction

In our recent feature “What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule,” we briefly discussed AT&T Mobility LLC v. Concepcion, No. 09-893, a case which asks the United States Supreme Court to determine whether the Federal Arbitration Act preempts California’s Discover Bank rule.  The Discover Bank rule deems unconscionable class action and class arbitration waivers in adhesive contracts in circumstances where a consumer alleges that a party with superior bargaining power has committed widespread but small-dollar fraud.  Petitioner AT&T Mobility LLC (“AT&T Mobility”) has filed its brief (here); various organizations, including the Chamber of Commerce of the United States of America, have filed an impressive stack of amicus curiae briefs supporting AT&T Mobility (here); Vincent and Liza Concepcion (the “Concepcions”) have filed their brief, which was posted online earlier today (here); and AT&T will presumably submit a reply brief.  The Court has scheduled argument for November 9, 2010. 

AT&T Mobility is an extremely important case because it will decide whether the Federal Arbitration Act preempts certain state law unconscionability and public-policy-based rules that are principally directed at class arbitration and class action waivers.  This issue has spawned a number of conflicting decisions in the state and federal courts, including Feeney v. Dell, Inc. 454 Mass. 192 (2009), a case we blogged back in 2009 (posts here and here). 

This two-part feature takes a closer look at AT&T Mobility, considers the principal issues before the Court, and ventures a guess on what the outcome will be.   This Part I discusses the background of the case, and Part II (here) outlines Federal Arbitration Act preemption rules, analyzes and explains why we believe the Federal Arbitration Act expressly and impliedly preempts the Discover Bank rule, and provides our best guess as to what the Supreme Court will conclude.     Continue Reading »

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

July 23rd, 2010 Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court Comments Off on What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

After deciding Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. and Rent-A-Center West v. Jackson, the United States Supreme Court left federal arbitration law at a crossroads.  In both cases the Court adhered quite faithfully to its prior Federal Arbitration Act jurisprudence, under which it enforces arbitration agreements according to their terms, without regard to other considerations.  In Rent-A-Center the Court implicitly reaffirmed that these pro-enforcement rules apply equally to contracts of adhesion. 

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank  unconscionability rule is pre-empted by the Federal Arbitration Act.  That rule deems unconscionable under California law class-action or class-arbitration waivers where:  (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.  .  .  .”  Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668). 

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud.  .  .  are against the policy of the law.”   See Cal. Civ. Code § 1668.  If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages.  See Discover Bank, 36 Cal. 4th at 162-63.  Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions  — would be unconscionable under the rule.  

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption.  In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act.  According to the Second Circuit, California’s  Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act.  Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9th Cir. 2007) (emphasis in original)). 

On first blush the Second Circuit’s decision seems reasonable.  But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T MobilityContinue Reading »

Introducing Guest Blogger John (Jay) McCauley

June 23rd, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Guest Posts, Practice and Procedure, Unconscionability, United States Supreme Court Comments Off on Introducing Guest Blogger John (Jay) McCauley

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 Act jurisprudence.  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.

Jay is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

We hope you enjoy Jay’s article.

Guest Post: A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson

June 23rd, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Practice and Procedure, Unconscionability, United States Supreme Court Comments Off on Guest Post: A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson

By John (Jay) McCauley

Despite all the alarmist reaction already showing up in the press, the holding in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010) is both modest and predictable.   Arbitration agreements always do one thing:  take decisions from judges and give them to arbitrators.  Ever since 1925, such agreements have always been enforced to exactly the same extent as any other agreement is enforced.   Not less so, but also not more so.  Are they enforced even when the decision in question is the “gateway” decision of whether the parties must arbitrate their dispute?  Yes, as long as the agreement delegating even that decision to the arbitrator is explicit and unmistakeable.  Is that news? No. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (dictum).

Should it matter that this delegation language is physically located within the challenged arbitration agreement itself?  No.  (If the answer were “Yes,” any contract drafter could “solve” the problem by plucking out the delegation provision and pasting it onto another sheet of paper to be separately executed as the “delegation agreement.”)  What does matter is whether the challenge brought against the arbitration agreement is the kind that goes to the enforceability of the delegation provision itself.  Are there such challenges in theory?  Sure, dozens of them.  Does that fact put severe brakes on the implications of the Rent-a-Center holding for other cases?  Yes, that’s the point.  Were there any such challenges in the Rent-a-Center case?  No.  None whatsoever.  As the Court noted, the party challenging arbitration in this particular case did not even attempt to raise one.  Would the Court have been open to listening to such a challenge?  Yes.  Not just by implication.  It expressly said it would.

Some of the alarmist commentary stands on the cynical premise that law is pure politics, such that the statement “the outcome of this case is pro-business” is thought to serve as a principled basis the court should have used to distinguish the precedent it is required to honor.  Some of these commentaries, remarkably enough, even come from lawyers.

The more sophisticated of the alarmist commentaries made a more sophisticated mistake.  They took the way Justice Scalia framed the issue in the first sentence of the decision, and leaped to the conclusion that that sentence could serve as the entire holding.

Justice Scalia said:  “We consider whether.  .  .  a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”

His answer (the holding) was not exactly “It may not.”  His answer was really, “It may not, unless, of course, the provision assigning the decision to the arbitrator is itself subject to any challenge whatsoever  (including unconscionability) recognizable to anyone familiar with the common law of contracts.

To which I would only add the not very dramatic commentary:  “Nothing very remarkable about that.”

 

EDITOR’S NOTE: John (Jay) McCauley is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel.  He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators.   He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School.  An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court.  He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR.  You can visit his website here.

Our post introducing Jay is here.

The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

June 21st, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

Yesterday the United States Supreme Court decided Rent-A-Center West v. Jackson, ___ U.S. ___, slip op. (June 21, 2010).  Rent-A-Center raised the question whether “a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”  The United States Court of Appeals for the Ninth Circuit had said “yes,” but the Supreme Court said “no.”

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable.  The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.  

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of  Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).   And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was  joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor.  See Dissenting Op. at 1.  (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle.  See Slip op. at 9.)  Continue Reading »