Part IIIC: Is the Narrow Construction Sustainable?
Introduction
In Part IIIB (here) we discussed in general terms the “Narrow Construction” of the Arbitration Fairness Act of 2009 (the “Fairness Act”), which would limit the scope of Proposed Section 2(c) to situations where the party resisting arbitration claims that the arbitration agreement requires predispute arbitration of consumer, franchise, employment or statutory civil rights disputes. We also set forth the five premises on which the Narrow Construction is based. This Part IIIC addresses the validity of those premises. [Because this post frequently refers to Proposed Section 2 and its subsections, we have reproduced at the end the pertinent parts of Proposed Section 2.]
The Narrow Construction is fairly complex. A court choosing it would have to determine each of its five premises to be valid. In addition, the validity of Premise 3 is interlinked to that of Premise 5: Premise 3 is easier to accept when viewed without regard to Premise 5 and Premise 5 is harder to accept when viewed in isolation from Premise 3. If a court believes that Premise 3 is reasonable, but has reservations about its validity, when it considers Premise 3 in conjunction with Premise 5, it may conclude that both are invalid. But if it is confident that Premise 3 is valid, that confidence might lead it to conclude that Premise 5 is valid. These are important considerations that a party advocating one construction or the other should take into account in structuring its argument.
Premise 1: The Doctrine of Severability is Derived from the text of FAA Section 2, Which is Incorporated in Pertinent Part into Proposed Section 2(a).
Premise 1 is fairly straightforward. FAA Section 2 is the most important provision of the FAA in that it makes arbitration agreements within its scope “valid, irrevocable and enforceable.” The United States Supreme Court has declared that by enacting FAA Section 2, “Congress. . . mandated the enforcement of arbitration agreements” and intended to “place ‘[them]. . . upon the same footing as other contracts. . . .'” See Southland Corp. v. Keating, 465 U.S. 1, 10 & 15-16 (1984) (quoting legislative history). If the Fairness Act is passed, FAA Section 2 will be incorporated into Proposed Section 2(a) with some modifications, which are set forth in bold:
A written provision in. . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title.” (emphasis added)
The United States Supreme Court in Buckeye Check Cashing v. Cardengna, 546 U.S. 440, 449 (2006), explained that severability “ultimately arises out of [FAA] Section 2’s substantive command that arbitration agreements be treated like all other contracts.” 546 U.S. at 447 (emphasis added). According to the Court, “[t]he rule of severability establishes how this equal-footing guarantee for ‘a written [arbitration] provision’ is to be implemented.” Id. [Historical note: The United States Supreme Court originally did not base the doctrine of severability on FAA Section 2, but on FAA Section 4, which authorizes federal courts to compel arbitration. See Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967).]
Buckeye provides strong support for the argument that severability is derived from FAA Section 2, which, in turn, supports the argument that severability is derived from the text of Proposed Section 2(a). By the same token, Buckeye also evidences the Court’s tacit recognition that severability is not “provided” by that text, at least not expressly so. The Court merely said that severability “implemented” that text.
Premise 2. For different reasons, the Own Jurisdiction Rule is also derived from the text of FAA Section 2, which is incorporated in pertinent part into Proposed Section 2(a).
Premise 2 is arguably not as strong as Premise 1, but it makes logical sense. The United States Supreme Court has not expressly attributed to FAA Section 2 the rule that arbitrators can determine questions of arbitrability when the parties “clearly and unmistakably” so agree (the “Own Jurisdiction Rule”). The rule originated in cases governed by federal labor law, not the FAA. See AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986). In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995), the Court applied it to cases governed by the FAA. But the Court’s reasoning suggests that the Own Jurisdiction Rule is nevertheless rooted in FAA Section 2’s command that an arbitration agreement should be enforced like any other contract:
Just as arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question “who has the primary power to decide arbitrability” turns upon what the parties agreed about that matter. Did the parties agree to submit the arbitrability question itself to arbitration? If so, then the court’s standard of review for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate.
. . . .
This Court, however, has . . . added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability: Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so.
514 U.S. at 943-44 (emphasis in original; citations omitted).
While the Court in First Options did not expressly rely on or even cite FAA Section 2, the notion that arbitrators can determine arbitrability if the parties agree is one of the logical consequences of FAA Section 2’s enforceability command. And just as severability is one of the ways that command is “implemented” when a party challenges the validity and enforceability of the contract containing the arbitration agreement, so can the Court’s “clear and unmistakable” requirement be considered the way FAA Section 2’s command is implemented when the question is whether the parties agreed to arbitrate arbitrability.
Premise 3. Proposed Section 2(c)’s “except as otherwise provided in this chapter” prefatory language was intended to refer not only to Proposed Section 2(a)’s text, but also to judicial doctrines derived from that text.
Premise 3 is more difficult to sustain than Premises 1 and 2. The validity of Premise 3 is linked to that of Premise 5 and vice-versa. The more confident a court is about Premise 3’s validity, the more likely it is that it will find Premise 5 to be valid. The converse is also true.
Proposed Section 2(c) says that the “validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator” “except as otherwise provided in” FAA Chapter 1. It prescribes the manner in which Proposed Section 2(a) and Proposed Section 2(b) are to be implemented under the Fairness Act.
There are three different types of “validity or enforceability” questions that may arise under Proposed Section 2. First, there will be cases where neither party contends that Proposed Section 2(b) applies, in which case the agreement will be valid and enforceable “to the same extent as contracts generally.” Second, there will be cases where one party contends the agreement to arbitrate falls under Proposed Section 2(b) and is unenforceable because it requires arbitration of a consumer, employment, franchise or statutory civil rights dispute. Third, there will be cases where one party contends that neither 2(a) nor 2(b) applies.
If Proposed Section 2(c)’s prefatory language “except as otherwise provided” is interpreted to mean “except as otherwise” expressly “provided” in Chapter 1, then judicial doctrines that help implement provisions of Chapter 1 — but are not expressly provided in Chapter 1 — are irrevelvant. Proposed Section 2(a) does not expressly provide for the doctrine of severability or the Own Jurisdiction Rule and, under this interpretation, those doctrines could not countermand Proposed Section 2(c), even when the arbitration agreement at issue concededly falls under Proposed Section 2(a). Proposed Section 2(a) only says arbitration agreements within its scope are enforceable, not that they must be enforced in a manner contrary to Proposed Section 2(c).
For Premise 3 to be valid, Proposed Section 2(c) must be interpreted to mean “except as otherwise provided by” the text of Proposed Section 2(a), including the judicial doctrines that implement that text. While this interpretation may read too much into Proposed Section 2(c)’s prefatory language, it has some support in both the text of the Fairness Act and judicial decisions interpreting FAA Section 2.
When the dispute is whether an arbitration agreement falling under FAA Section 2 is enforceable to the same extent as other contracts, severability and the Own Jurisdiction Rule have traditionally provided the manner in which FAA Section 2’s enforceability command is to be implemented when certain types of enforceability and other arbitrability questions arise. In all other situations, the default rule has been that the court decides the enforceability or arbitrability question.
As respects disputes over arbitration agreements that fall under Proposed Section 2(a), but are not alleged to fall under Proposed Section 2(b), Proposed Section 2(a), like its predecessor, FAA Section 2, arguably “provides” not only that the agreement is enforceable, but how that enforceability command will be implemented in certain situations. So, if the parties clearly and unambiguously agreed that arbitrability would be decided by the arbitrators, then Proposed Section 2(a) arguably “provides” that the arbitrator should decide what other matters fall within the scope of the arbitration agreement. And if the question is whether an attack on the contract as a whole renders the entire agreement, including the arbitration clause, unenforceable or subject to rescission, then Proposed Section 2(a) arguably “provides” that the arbitration agreement itself is to be enforced because it is severable from the contract in which it is contained.
Disputes as to whether Proposed Section 2(a) is applicable in the first place stand on a different footing. In that class of cases, what Proposed Section 2(a) “provides” about its implementation to a dispute within its scope is irrevelant until a decision maker determines the threshold question whether the agreement falls under Proposed Section 2(a) in the first place. In those cases, Section 2(c) provides the manner in which the FAA’s provisions are to be implemented, so this question would be decided by the court.
Assuming a court were to find this interpretation reasonable, it could conclude that the statute is ambiguous. That would require the court to decide whether it, or the alternative construction, best suits what Congress had in mind.
Premise 4. The “except as otherwise provided language in this title” language in Proposed Section 2(a) was intended to exempt the disputes listed in Proposed Section 2(b) from the command of Proposed Section 2(a).
Premise 4 is fairly straightforward. Proposed Section 2(a), like Section 2(c), contains the proviso “except as otherwise provided in this title.” That proviso is broader than Proposed Section 2(c)’ s prefatory language in that it extends to anything “otherwise provided” in this “title” — i.e., Chapters 1, 2 and 3 of the FAA — not just anything “otherwise provided” in Chapter 1.
There is little question that Section 2(a)’s proviso was, at the very least, intended to mean “except as otherwise provided” in Section 2(b). Section 2(a) defines the universe of arbitration agreements subject to the FAA that are valid and enforceable. Section 2(b) was intended to carve out a subset of those agreements and declare them invalid and unenforceable. If Section 2(a) was not subject to Section 2(b), then that subset of agreements would be enforceable under Section 2(a) but unenforceable under Section 2(b), which makes no sense.
Premise 5. Proposed Section 2(a)’s “except as otherwise provided in this title” language was not intended to mean that doctrines judicially derived from the text of Proposed Section 2(a) are subject to Proposed Section 2(c).
The validity of Premise 5 is less clear and is tied to the validity of Premise 3. As discussed, both Proposed Section 2(c) and Proposed Section 2(a) contain “except as otherwise provided” language. Interpreted literally, Proposed Section 2(a) and Proposed Section 2(c) cancel each other out: Proposed Section 2(c) may be subject to Proposed Section 2(a), but Proposed Section 2(a) is likewise subject to Proposed Section 2(c). Even if one accepts the validity of Premise 3 — that Proposed Section 2(c) is limited in scope to cases where the question is whether Proposed Section 2(a) is applicable in the first place — acceptance of the Narrow Construction requires that this conflict be resolved.
To accept the validity of Premise 5, one must interpret (a) Proposed Section 2(a) to be subject to Proposed Section 2(b), but not Proposed Section 2(c); and (b) Proposed Section 2(c) to be subject to Proposed Section 2(a). While far from perfect, that construction gives meaning to the “except as otherwise provided” language in Proposed Sections 2(a) and 2(c).
This construction may be questionable because it would result in Proposed Section 2(a)’s proviso being interpreted more narrowly than Proposed Section 2(c)’s prefatory language, even though Proposed Section 2(a)’s proviso is broader than Proposed Section 2(c)’s prefatory language. But, as we shall see in Part IV, the breadth of Proposed Section 2(a)’s proviso can be given effect by interpreting it to exclude from Proposed Section 2(b) arbitration agreements that fall under the Convention on the Recognition of Foreign Arbitral Awards, which are governed by Chapter 2 of the FAA.
A court with doubts about this construction, or with doubts about the validity of Premise 3, might conclude that the drafters intended that neither provision should intrude upon the other. In that case, a Court could interpret (a) Proposed Section 2(c) as abrogating severability and the Own Jurisdiction Rule in all cases; and (b) Proposed Section 2(a) as requiring enforcement of arbitration agreements within its scope that do not fall under Proposed Section 2(b), but not as requiring severability or the Own Jurisdiction Rule to implement that enforcement. That interpretation would support the Broad Construction and is consistent with interpreting Proposed Section 2(c)’s prefatory language as meaning “except as otherwise [expressly] provided by this chapter.” (See Premise 3, supra, & Part IIIA of this post, here.)
Finally, if a court were to deem both constructions reasonable, it would be faced with a statutory ambiguity. Once again, that would require the Court to decide which construction — Broad or Narrow — best serves the purpose of the statute. While a strong argument could be made for the Narrow Construction, the Broad Construction is not inconsistent with the Act’s purpose, either. Furthermore, the Court might find it significant that the drafters could easily have — but have not — limited the scope of Proposed Section 2(c) to disputes over whether the invalidity or unenforceability argument turns on whether Proposed Section 2(a) or Proposed Section 2(b) applies to the arbitration agreement. That fact tends to support the Broad Construction.
In Part IV we examine how the Fairness Act might be interpreted in cases governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In Part V we sum up and move on.
For reference purposes Proposed Sections 2(a)-(c) are set forth below with the key, newly added text in bold:
Sec. 2. Validity and enforceability.
(a) A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title.
(b) No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of–
(1) an employment, consumer, or franchise dispute; or
(2) a dispute arising under any statute intended to protect civil rights.
(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law. Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.
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Tags: Arbitrability, Arbitration, Arbitration Agreement, Arbitration Fairness Act of 2009, AT&T Technologies, Buckeye, civil rights, clearly and unmistakably, commercial, construction, consumer, employment, Fairness Act, Federal Arbitration Act, First Options, franchise, industry, interpretation, predispute arbitration agreement, Prima Paint, reinsurance, severability, Southland
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