When Must a Dispute Be Submitted to Arbitration? Who Makes the Call?, Part II
A recurring question in arbitration law is who is empowered to determine if parties are required to arbitrate a particular matter. The issue is likely to come up when a party sues to compel arbitration of a dispute. Part I of this article in the February issue of the Journal discussed potential defenses a party may assert when the opposing party seeks to compel arbitration. Part II discusses whether a court must decide if it should determine arbitrability, or if it should remand the matter for the arbitration panel to decide whether the disagreement should be arbitrated.
In John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 546-47 (1964), the parties disagreed as to whether a collective bargaining agreement (CBA) with an arbitration clause bound a company that had merged with and taken over the operations of the employer which had entered into the CBA with the union. The Court determined that a court should decide whether the CBA survived the merger. The Court observed:
“Under our decisions, whether or not the company was bound to arbitrate, as well as what issues it must arbitrate is a matter to be determined by the Court on the basis of the contract entered into by the parties.”…The duty to arbitrate being of contractual origin, a compulsory submission to arbitration cannot precede judicial determination that the collective bargaining agreement does in fact create such a duty. Thus, just as an employer has no obligation to arbitrate issues which it has not agreed to arbitrate, so a fortiori, it cannot be compelled to arbitrate if an arbitration clause does not bind it at all. (Citations omitted.)
The Supreme Court held in Prima Paint v. Floyd & Conklin Mfg., Inc., 388 U.S. 395, 404 (1967), that “a court may consider only issues relating to the making and performance of the agreement to arbitrate.” The Court took note of the fact that §4 of the Federal Arbitration Act requires a court to order the parties to arbitrate “upon being satisfied that the making of the agreement to arbitrate … is not in issue.” The Court held that “a federal court may consider only issues relating to the making and performance of the agreement to arbitrate.”1 Thus, the Court ruled that an arbitration panel, not a court, is to decide an issue of whether there was fraud in the inducement of a contract containing an arbitration clause.
In AT&T Technologies v. Communication Workers of America, 475 U.S. 643, 649 (1986), the Court stated:
[T]he question of arbitrability — whether a collective bargaining agreement creates a duty of the parties to arbitrate — is undeniably an issue for judicial determination. Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.
The Court has described the issue of whether the parties have agreed to arbitrate as a “threshold question.” In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), the Court applied its view that arbitrability is decided by a court rather than by an arbitrator in the absence of a clear agreement by the parties to submit the question to arbitration. In that case, the arbitration panel’s decisions both on the arbitrability of the dispute and on the merits were set aside as it was not established that the Kaplans clearly agreed to authorize the panel to determine arbitrability.
The plaintiff in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), contended that his claim should not have to be arbitrated notwithstanding his having entered into a contract with an arbitration clause. He argued that the entire contract was void as it required the payment of a usurious interest rate that violated Florida law. The Court ruled that the matter was to be decided by the arbitrator rather than a court as the challenge was to the validity of the contract as a whole, not to just the arbitration clause. The Court noted that there are two types of challenges to the validity of a contract to arbitrate. The challenge may be either to the agreement to arbitrate or, alternatively, a challenge to the validity of the entire contract containing the agreement to arbitrate. A court must decide a challenge to the validity of the arbitration agreement.2 A challenge to the contract as a whole is to be decided by the arbitration panel.
Applying the reasoning in Buckeye Check Cashing, the Court in Rent-A-Center West, Inc. v. Jackson, 561 U.S. ___, 130 S. Ct. 2772 (2010), held that the plaintiff’s assertion that the subject arbitration contract was unconscionable must be decided by the arbitrator, not the court. There the arbitration agreement provided that the “arbitrator, not any federal, state or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, or formation of this [a]greement including, but not limited to, any claim that all or any part of this agreement is void or voidable.” Observing that agreements to arbitrate are considered on “an equal footing with other contracts,”3 the Court found that what it referred to as the “delegation” provision was an enforceable agreement to arbitrate threshold issues.
Rent-A-Center also presented a question as to whether the decision related to the contract as a whole or to the arbitration clause. The subject agreement required arbitration of all disputes arising out of the plaintiff’s employment. In holding that an arbitrator rather than a court should decide the issue of unconscionability, the Court reasoned that the plaintiff was contesting the unconscionability of his employment agreement as a whole. He had not argued that the delegation clause was unconscionable.4
In John Wiley & Sons, Inc., the Court stated that “[o]nce it is determined…that the parties are obligated to submit the subject matter of a dispute to arbitration, ‘procedural’ questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator.”5 In Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), the Court held that the timeliness of the claimant’s demand for arbitration when the agreement required a demand to be made within six years of the contested occurrence was a procedural issue that should be decided by the arbitrator.
In Bland ex rel. Coker v. Health Care and Retirement Corporation of America, 927 So. 2d 252, (Fla. 2d DCA 2006), the court declined to decide if a claim under Florida’s Nursing Home Resident’s Rights Act, F.S. §§400.023(2)-400.0238, was enforceable when the remedies available to the claimant did not include the right to recover punitive damages or attorneys’ fees, remedies which are permitted under the statute. Having determined that procedural unconscionability was lacking, the court reasoned that it was precluded from addressing the issue of substantive unconscionability.6 However, the court found that whether the agreement’s limitations on remedies violated public policy was separate from the issue of unconscionability. The court held that the arbitrator should determine whether the remedial limitations were enforceable as the argument addressed the validity of the contract as a whole, rather than the agreement to arbitrate. It was noted that if the claim did not justify the full measure of damages allowed by the statute, the issue of the unavailability of those damages would be moot.
In Global Travel Marketing, Inc. v. Shea, 908 So. 2d 392 (Fla. 2005), the Florida Supreme Court determined that an agreement to arbitrate personal injury claims of a minor signed by the child’s parent was not unenforceable as violating public policy. This decision is distinguishable from that in Bland as it dealt with whether public policy impaired the formation of the arbitration agreement. Formation issues are for a court to decide.
The Florida Supreme Court in Shotts v. OP Winter Haven, Inc., 86 So. 3d 456, 474 (Fla. 2011), ruled that it was for the court, not the arbitrator, to decide if the subject arbitration agreement violated public policy by barring the arbitrators from awarding punitive damages in a negligence action against a nursing home when such were recoverable pursuant to the Florida Nursing Home Resident’s Act.7
Drafting or Entering into a Contract Containing an Agreement to Arbitrate
All parties to an arbitration should consider what they want the arbitrator to decide. Do they want the scope of the arbitrator’s jurisdiction to be limited to matters growing out of the performance of the specific terms of the particular contract, or to go beyond that to other relationships between the parties, such as torts committed in the performance of the agreement? Do they want the arbitrator or a court to decide a question of arbitrability, such as whether the parties have an enforceable agreement to arbitrate the claim in question? Are class or collective arbitrations to be allowed or barred? The agreement should be specific in this regard.
It is judicious to be certain that the existence of the arbitration agreement has been communicated to the nondominant party, particularly if the latter is not sophisticated.
Attention should be given to what discovery will be authorized. It is not uncommon for an arbitration agreement to provide that the Federal Rules of Civil Procedure shall apply to arbitration proceedings.
Generally, a dominant party in the relationship, such as an employer, a cellular phone company, or a credit card company, will draft an arbitration agreement. The document should not be so one-sided as to be in the dominant party’s favor with terms imposing unilateral obligations on the nondominant party or granting special privileges to the dominant party. Attention must be given to the fact that a party cannot waive rights or statutory remedies, such as punitive and compensatory damages, or the right of a prevailing party afforded by statute to recover attorneys’ fees.
Finally, as a fail-safe, the parties may want to include a severability clause to provide that if any portion of the agreement is determined to be invalid, the balance will be enforced.
1 Prima Paint, 388 U.S. at 404 (1967).
2 Buckeye Check Cashing, 546 U.S. at 444.
3 Rent-A-Center, 130 S. Ct. at 2777.
4 Consider also R.W. Roberts Construction Co. v. St. Johns River Water Management Dist. Elec. for Use of McDonald Elec. , 423 So. 2d 630, 633 (Fla. 5th DCA 1982),
which held that an arbitration agreement “is treated as a separable part of the contract.”
5 John Wiley & Sons, 376 U.S. at 557.
6 Bland ex rel. Coker, 927 So. 2d at 257 .
7 Fla. Stat. §§400.022, 400.023.
Donald J. Spero is a graduate of the University of Michigan Law School who has practiced labor and employment law for more than 45 years , both in private practice and as in-house counsel for Sears, Roebuck and Co., from which he retired as senior employment counsel. He now devotes h is time to serving as a mediator and an arbitrator. He is board certified in labor and employment law.
This article is submitted on behalf of the Labor and Employment Law Section, Robert Stuart Turk, chair, and Robert Eschenfelder, editor.