Arbitrating Arbitrability: Three Recent Appellate Decisions On Delegation Clauses In Arbitration Agreements

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This summer, we discussed that the Supreme Court is reviewing whether an arbitration agreement’s clear delegation of the question of arbitrability to the arbitrator can be negated by a provision that exempts certain claims from arbitration. Henry Schein, Inc. v. Archer & White Sales, Inc., 207 L. Ed. 2d 1050 (2019). Since the Supreme Court granted certiorari in that case, three notable appellate decisions, two in the Ninth Circuit and one in the Third Circuit, have confronted related delegation questions. These cases all underscore the importance of paying careful attention to the drafting and presentation of arbitration provisions. Even seemingly minor differences in drafting and approach can result in disputes being heard outside their intended fora.

NINTH CIRCUIT

Shivkov v. Artex Risk Solutions, Inc.

On September 9, 2020, the Ninth Circuit issued a ruling in Shivkov v. Artex Risk Solutions, Inc. that addressed an issue of first impression in the circuit.[1] A large group of individuals and related business entities involved in the insurance industry filed a putative class action lawsuit alleging that the captive insurance companies that the defendants had formed and managed were illegal and abusive tax shelters. The relevant agreements between the parties contained an arbitration clause governed by the FAA, and the defendants moved to compel arbitration based on those terms. 

One of the key issues that the court addressed was whether the determination of the availability of class arbitration was presumptively for the court (rather than an arbitrator) to decide. The Shivkov court ruled definitively that “class arbitration is a gateway issue for a court to presumptively decide.”

This did not end the court’s analysis, though. The Shivkov court still needed to address the plaintiffs’ contention that the relevant arbitration provision evidenced “a clear and unmistakable intent to delegate the issue to the arbitrator.” The plaintiffs relied on the Ninth Circuit’s 2015 decision in Brennan v. Opus Bank, where the court held that “incorporation of the AAA Rules constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability.”[2] But, unlike in Brennan, in Shivkov the relevant arbitration provisions did not incorporate the AAA rules, but rather merely required that any arbitration, if necessary, be conducted before AAA. Accordingly, the Shivkov court did not “find clear and unmistakable evidence that the parties intended to delegate the gateway issue of class arbitration to the arbitrator by virtue of the AAA Rules . . . .”  And “[b]ecause Plaintiffs d[id] not claim that any other provision demonstrate[d] a clear and unmistakable intent to delegate the availability of class arbitration to the arbitrator,” the Shivkov court determined that the availability of class arbitration remain[ed] a gateway issue” for the court to decide.[3] 

Ultimately, because the arbitration agreement was silent as to the availability of class arbitration, the Shivkov court easily found that the agreements did not permit class arbitration pursuant to the Supreme Court’s recent ruling in Lamps Plus. But, importantly, it was the court, not the arbitrator, that made this determination.

SEIU Local 121RN v. Los Robles Regional Medical Center

Even more recently, SEIU Local 121RN v. Los Robles Regional Medical Center addressed whether the issue of the delegation of arbitrability should be treated differently in the labor context.[4] In 1996, the Ninth Circuit had determined that labor cases are different and that an arbitrator (rather than a court) should decide arbitrability as long as the agreement included a broad arbitration clause.[5] In 2010, however, the Supreme Court rejected the notion that labor arbitration disputes should be analyzed differently than commercial arbitration disputes.[6] As a result, the Los Robles court overruled the Ninth Circuit’s earlier ruling and now held that questions regarding the delegation of issues of arbitrability must be analyzed in the same way in both the labor and commercial contexts. 

With this new framework in place, the Los Robles court relied on the “well-settled principles ‘that whether parties have agreed to submit a particular dispute to arbitration is typically an issue for judicial determination,’” absent “‘clear and unmistakable’ evidence of the parties’ intent to have an arbitrator—rather than the court—decide whether the grievance is arbitrable.” Because the CBA at issue in Los Robles was silent as to the arbitrator’s authority to determine its own jurisdiction, the Ninth Circuit held that the district court was responsible for determining whether the grievance filed by SEIU was arbitrable.

THIRD CIRCUIT

MZM Construction Co. v. New Jersey Building Laborers Statewide Benefit Funds

On September 14, 2020, the Third Circuit also issued a ruling regarding the delegation of questions of arbitrability to arbitrators.[7] In MZM Construction Co. v. New Jersey Building Laborers Statewide Benefit Funds, the court was confronted with an arbitration agreement that explicitly stated that the parties agree to arbitrate “questions or grievances involving the interpretation and application of this Agreement” and that “[t]he Arbitrator shall have the authority to decide whether an Agreement exists, where that is in dispute.” Despite this clear and unmistakable language, MZM argued that the entire agreement was unenforceable due to fraud in the execution of the contract containing these arbitration provisions. MZM’s president had signed a one-page short-form agreement that incorporated by reference, but did not attach, an unsigned collective bargaining agreement that contained the relevant arbitration and delegation provisions. MZM argued that the entire agreement—the short-form agreement incorporating the collective bargaining agreement that contained the arbitration and delegation provisions—could not be enforced because the company’s president had felt pressured to sign the short-form agreement due to a threatened work stoppage and there was no evidence that MZM’s president ever saw the collective bargaining agreement containing the relevant provisions. As described by the court, the “critical question” was “who decides MZM’s contract defense.”

After summarizing several earlier Supreme Court and Third Circuit decisions, the MZM court recognized that none of them “dealt with a contract-formation dispute involving a delegation provision assigning that task to the arbitrator.” Relying on Section 4 of the FAA—which mandates that a court be “satisfied” that an arbitration agreement exists—the MZM court settled this open question in the Third Circuit. In line with the Fourth, Fifth, and Eighth Circuits, and district courts in the Seventh Circuit, the Third Circuit held that, “under section 4 of the FAA, courts retain the primary power to decide questions of whether the parties mutually assented to a contract containing or incorporating a delegation provision.” Therefore, because the plaintiff had stated a claim for fraud in the execution of the contract containing the delegation provision, the plaintiff had “put the formation of the delegation provision in issue and thus triggered the District Court’s power to adjudicate that claim.”

The Third Circuit explained “that nothing in our decision today precludes parties from delegating issues of contract formation.”  However, “the legal effect of the delegation must come from an ‘independent source’ outside the contract whose formation or existence is being disputed,” such as a “pre-negotiation contract in which the [parties] agree to arbitrate all arbitrability issues pertaining to future contracts between them.” Ultimately, the Third Circuit held that “unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue, those gateway questions are for the courts to decide.”

TAKEAWAYS

Shivkov and Los Robles are reminders that if a company wants an arbitrator (not the court) to determine arbitrability and treatment of class claims, it should make sure that its arbitration agreement says so in “clear and unmistakable” language. Otherwise, courts in the Ninth Circuit and elsewhere may default to the court deciding these gateway issues. 

The Third Circuit’s decision in MZM also shows that, even if clear and unmistakable delegation language exists, the way a company presents the agreements to the other party could result in those agreements (and the arbitration provisions within them) being interpreted by a court rather than the intended arbitrator, and even ultimately being found unenforceable. 


[1] 974 F.3d 1051 (9th Cir. 2020). In 2014, the Ninth Circuit issued an unpublished and nonprecedential opinion that was consistent with the ruling in Shivkov.  The Supreme Court has never taken up this gateway issue.   

[2] 796 F.3d 1125, 1130 (9th Cir. 2015).

[3] The Ninth Circuit rejected several other arguments offered by the plaintiffs in their attempt to escape arbitration, including their contentions that the arbitration provisions were unconscionable on fiduciary duty related grounds, the arbitration obligations did not survive termination, the parties had not agreed to arbitrate all of the plaintiffs’ claims, and non-signatories to the agreements could not compel arbitration. 

[4] No. 19-55185, 2020 WL 5583677 (9th Cir. Sept. 18, 2020).

[5] United Bhd. of Carpenters & Joiners of Am., Local No. 1780 v. Desert Palace, Inc., 94 F.3d 1308 (9th Cir. 1996).

[6] Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 300–01 (2010).

[7] 974 F.3d 386 (3d Cir. 2020).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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