Under the modern interpretation of the Federal Arbitration Act (FAA), companies routinely use forced arbitration clauses to hide employees’ claims of discrimination, retaliation, wage theft, and other workplace violations from public view. In forced arbitration proceedings, claims of employer wrongdoing may be decided in closed-door proceedings by company-paid arbitrators using rules promulgated by the employer. Increasingly, employees who object to this rigged system find their employers have included a “delegation provision” in their forced arbitration clauses, consigning those complaints to arbitration as well.
Having the power to hide most employment disputes in arbitration is a relatively recent jurisprudential win for employers. Historically, the U.S. Supreme Court rejected the idea that most complex claims, like employment disputes (which often raise interwoven issues of contract and public policy), even were “arbitrable,” or that they could be fairly decided in a private arbitral forum. In assessing the “arbitrability” of a claim, courts considered whether it was proper for a dispute to be heard by an arbitrator who was empowered to enforce the contract between the parties but lacked the power to enforce the law. Courts would assess the arbitrator’s ability, under the terms of the agreement, to render a full and fair hearing in the matters before them. They could also consider the impact forcing arbitration might have on public policy, such as whether it would be appropriate to enforce an arbitration clause in a contract of adhesion disseminated by a party with substantially more bargaining power.
In determining whether a claim is “arbitrable” today, the Court limits its scrutiny to whether parties “agreed to arbitrate,” and it sees no problem with finding such an agreement is present, even in preprinted contracts of adhesion presented to vulnerable employees and consumers on a take-it-or-leave-it basis.
Additionally, within the last decade, the U.S. Supreme Court has substantially weakened the plaintiff’s ability to fight the enforcement of ill-gotten arbitration provisions by sanctioning the use of “delegation provisions”. These clauses, which are usually found within the arbitration provision itself, typically provide that any dispute as to the arbitrability of a complaint should be decided by an arbitrator, not a court. Delegation provisions have not only disempowered courts from ruling on the question of arbitrability, they have increasingly empowered for-profit arbitrators to decide whether they, themselves, have the power to hear and rule on a person’s claims.
Starting in 1953, this timeline carries readers to present-day, reviewing along the way the question of what arbitrability is, who decides whether a matter is arbitrable, and how the U.S. Supreme Court’s view on this issue has evolved over time. Click on any moment in the timeline to read the case history.
Relevant Facts: Customers of a securities brokerage firm sued under the Securities Act of 1933, a law designed to protect the rights of investors. The brokers who allegedly defrauded their customers tried to force arbitration under the terms of the consumer contract.
Question Before The Court: Whether a pre-dispute arbitration clause can legally require a person acquiring securities to waive compliance with certain provisions of the Securities Act.
The Opinion: After first establishing that the Federal Arbitration Act (FAA) applied to purchases of stocks and securities, the Court addressed whether the Securities Act carved out an exception to the FAA. To determine whether arbitration should be compelled, the Court looked to the primary purpose of both federal statutes, and found that the Securities Act was written to help equalize an inherently unequal bargaining position between buyers and sellers of securities by, inter alia, giving buyers a wider choice of courts and venues. The Court found that the pre-dispute arbitration clause at issue here required the buyer to “surrender on the advantages the Act gives him and surrenders it at a time when he is less able to judge the weight of the handicap the Securities Act places upon his adversary.”
The Court noticed three problems faced by plaintiffs if compelled to arbitrate. First, the matter at issue required not just the simple determination of the value of a commodity or the amount of money due under a contract, but a subjective finding by the arbitrator on the purpose and knowledge of an alleged violator of the law, without the benefit of judicial instruction on what the law requires. Second, the arbitrator’s decision could be rendered without explanation, without a complete record, and without any subsequent ability to review the legal standards applied. Finally, the power to vacate the award was severely limited under the Federal Arbitration Act (FAA), with no provision for judicial review for error in interpretation or determination of legal issues.
Although the Court recognized that, through the FAA, people have “an opportunity to generally secure prompt, economical and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment,” they ultimately held that the intentions of Congress in passing the Securities Act could only be carried out by holding the arbitration agreement invalid with respect to issues arising out of that law.
Unfortunately, the holding of this case was later hollowed out in Shearson/ American Express, Inc v. McMahon, 482 U.S. 220 (1987), and then fully overturned in R. de Quijas v. Shearson/American Express, 490 U.S. 477 (1989).
Moseley v. Electronic & Missile Facilities, 374 U.S. 167 (1963)
Relevant Facts: A plumbing and heating contractor subcontracted with a primary contractor under a contract with the U.S. Department of Defense. The subcontract included an arbitration clause which provided for arbitration in New York. The plaintiff-subcontractor initiated a statutory claim under the Miller Act in Georgia, where the work under the subcontract was performed, alleging fraud in the inducement of both the contract and the arbitration agreement.
Question Before The Court: Whether a court or an arbitrator should determine the enforceability of an arbitration clause.
The Opinion: The Court found that where the petitioner alleged both the contract and the arbitration agreement were obtained by fraud, “[u]nder either the Miller Act or the [Federal Arbitration Act] (FAA), it seems clear that the issue of fraud should first be adjudicated [in a judicial forum] before the rights of the parties under the subcontract can be determined.” The Court sent the case back to the district court, where, if that court found fraud, the arbitration clause would be held unenforceable.
The concurring opinion emphasized that the question of fraud in the procurement of an arbitration agreement is a judicial one: “To allow this question to be decided by arbitrators would be to that extent to enforce the arbitration agreement even though steeped in the grossest kind of fraud.”
Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967)
Relevant Facts: Two companies entered into a contract. One sued the other for breach of contract and fraudulent representation. In the lower courts, the defending company successfully sought to compel arbitration under a broad arbitration clause in the agreement.
Question Before The Court: Whether arbitration clauses are severable from the contracts that contain them.
The Opinion: The Court found that, because the Federal Arbitration Act (FAA) specifies the manner in which federal courts are to treat questions relating to arbitration clauses, in considering whether to compel arbitration under the FAA, “a federal court may not consider a claim of fraud in the inducement of the contract generally . . . but may consider only the issues relating to the making and performance of the agreement to arbitrate.”
With that framework in mind, the Court held that arbitration clauses are severable from the contracts that contain them. In the Court’s view, Section 4 of the FAA requires courts to order arbitration once it is satisfied that the “making of the agreement to arbitrate . . . is not at issue.” Since the challenge in this case was to the formation of the contract, at large, rather than specifically to the arbitration clause contained within, and because there was no evidence that the parties intended to prevent this type of claim from being submitted to arbitration, the Court ruled that the FAA demanded the claim proceed in arbitration.
With the Prima Paint ruling, courts must look at challenges to arbitration clauses separately from challenges to the contracts that contain them. If a person challenges a contract at large, unless a specific challenge to the arbitration clause itself is launched, the court will compel arbitration, regardless of the possible unenforceability of the larger contract.
The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972)
Relevant Facts: A contract between two companies contained a forum-selection clause requiring any litigation to proceed in London. Later, the plaintiff filed suit in admiralty in the United States. The defendant moved for dismissal under the forum-selection clause.
Question Before The Court: Whether a choice-of-forum clause in a contract requiring all controversies to be adjudicated in an international foreign jurisdiction is enforceable.
The Opinion: At the time of this case, many courts at the federal and state level declined to enforce forum-selection clauses as a matter of public policy. With this case, the U.S. Supreme Court took the opposite approach, finding that parties are free to waive their rights to particular jurisdictions and other procedural safeguards, and holding that the forum-selection clause, which was the result of “an arm’s length negotiation by experienced and sophisticated businessmen,” should be binding on parties unless they can meet the heavy burden of showing that its enforcement is “unreasonable, unfair, and unjust.” Disregarding concerns about the ability for parties to receive equal and just treatment in alternative forums, the Court here asserted, “The argument that such clauses are improper because they tend to ‘oust’ a court of jurisdiction is hardly more than a vestigial legal fiction. . . . It reflects something of a provincial attitude regarding the fairness of other tribunals.”
Although this case did not involve the Federal Arbitration Act, the Court has subsequently maintained that arbitration clauses are “mere forum-selection clauses” and has enforced them based on the (frequently incorrect) assumption that they were freely negotiated by parties of equal bargaining power. See, e.g., Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (finding a strong presumption in favor of freely negotiated contractual choice-of-forum provisions). Furthermore, the Court’s embrace of non-judicial forums, and its downplaying of the potential harms to plaintiffs in those forums, paved the way to an exponential increase of dispute resolution in forums other than a court of law, including forced arbitration.
Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974)
Relevant Facts: An employee covered by a collective bargaining agreement alleged that he was fired because of racial discrimination. After filing a grievance under the terms of the collective bargaining agreement and losing in arbitration, he filed a complaint with the EEOC. The EEOC sided with the arbitrator, and dismissed the charge brought by the worker. The employee persisted by filing a Title VII claim in federal district court. The district court, and then the appellate court, held the plaintiff had no right to sue under Title VII because he was bound by the arbitrator’s finding.
Question Before The Court: Whether an employee has the right to pursue statutory claims in federal court irrespective of a requirement to arbitrate, and whether arbitration is an appropriate forum for resolving statutory claims.
The Opinion: The Supreme Court found for the worker, holding that an employee’s statutory right to a new trial under Title VII of the Civil Rights Act of 1964 is not foreclosed by prior submission of his claim to final arbitration under the non-discrimination clause of a collective bargaining agreement. Identifying that “federal courts have been assigned plenary powers to secure compliance with Title VII,” and contrasting those judicial powers with the powers of the EEOC, the Court noted, “There is no suggestion in the statutory scheme that a prior arbitral decision either forecloses an individual’s right to sue or divests federal courts of jurisdiction. . .The private right of action remains an essential means of obtaining judicial enforcement of Title VII. In such cases, the private litigant not only redresses his own injury but also vindicates the important congressional policy against discriminatory employment practices.”
The Court’s opinion also spoke directly to whether a claim is actually “arbitrable” in the sense that the arbitrator is capable of fairly rendering a decision based on the law, when it provided, “The factfinding process in arbitration usually is not equivalent to judicial factfinding. The record of arbitral proceedings is not as complete; the usual rules of evidence do not apply; and rights and procedures common to civil trial, such as discovery . . . and compulsory testimony under oath, are often severely limited or unavailable. . . . It is the informality of arbitral procedure that enables it to function as an efficient, inexpensive, and expeditious means for dispute resolution. This same characteristic, however, makes arbitration a less appropriate forum for final resolution of Title VII issues than the federal courts.”
In considering the role of the arbitrator in adjudicating contractual claims versus statutory claims, the Court observed that “the arbitrator has authority only to resolve questions of contractual rights, and this authority remains, regardless of whether certain contractual rights are similar to, or duplicative of, the substantive rights secured by Title VII. . . . The choice of forums inevitably affects the scope of the substantive right to be vindicated. . . In submitting his grievance to arbitration, an employee seeks to vindicate his contractual rights . . . By contrast, in filing a lawsuit under Title VII, an employee asserts independent statutory rights accorded by Congress. . . . We think it clear there can be no prospective waiver of an employee’s rights under Title VII. . . . We hold that the federal policy favoring arbitration does not establish that an arbitrator’s resolution of a contractual claim is dispositive of a statutory claim under Title VII.”
Barrentine v. Arkansas-Best Freight System, 450 U.S. 728 (1981)
Relevant Facts: A group of unionized truck drivers sued a trucking company for wage theft under the Fair Labor Standards Act (FLSA). The truckers began by filing a grievance per their collective bargaining agreement, which was rejected without explanation. The truckers then filed a claim in federal district court under the FLSA, which the court rejected. The Court of Appeals affirmed, concluding that the petitioners’ submission to arbitration barred them from asserting an FLSA claim in court.
Question Before The Court: Whether an employee may pursue both contractual and statutory rights claims through arbitral or judicial proceedings.
The Opinion: The Court held that FLSA claims are not barred by prior submission to contractual dispute resolution procedures like arbitration. Noting that FLSA rights arise out of a statute to be considered separate from contractual rights, the Court provided, “Not all disputes between an employee and an employer are suited for binding resolution in accordance with the procedure established by [arbitration].” In reaching its decision, the Court explored when individual statutory rights outweigh the national policy favoring arbitration and engaged in a very long discussion of why arbitration is an inappropriate forum for the resolution of FLSA claims.
Unfortunately, the central holding of this case is gutted in subsequent cases, starting with Moses H. Cone Memorial Hospital v. Mercury Const. Co. 460 U.S. 1 (1983), decided just two years later.
Moses H. Cone Mem. Hosp. v. Mercury Const. Co., 460 U.S. 1 (1983)
Relevant Facts: A hospital contracted with a building contractor and an architect to renovate its facilities. While the contract involving the building contractor included an arbitration clause, the contract with the architect did not. After a complicated dispute concerning the cost of the project arose, multiple legal actions were filed in both state and federal court, including motions to compel arbitration.
Question Before The Court: Whether state courts have the requisite jurisdiction to grant motions to compel arbitration under the Federal Arbitration Act (FAA); how far the nation’s federal policy favoring arbitration extends; and whether federal courts may defer to state courts when both are adjudicating parallel claims regarding the enforceability of an arbitration provision.
The Opinion: The Court focused on the FAA’s “statutory policy of rapid and unobstructed enforcement of arbitration agreements” and professed that Section 2 of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. . . . The [FAA] established that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself, or an allegation of waiver, delay, or a like defense to arbitrability.”
The Court was unmoved by the argument that, should the hospital be compelled to arbitrate its dispute with the building contractor, but not the architect against whom there was also pending litigation under the same facts, then it would have to resolve the two disputes in separate forums. To that point, the Court lamented that such misfortune “occurs because [the FAA] requires piecemeal resolution when necessary to give effect to an arbitration agreement. Under the [FAA], an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement.” In a footnote, the Court began weighing the idea of delegating the question of arbitrability to arbitrators, providing, “Some issues that might be thought relevant to arbitrability are themselves arbitrable – further speeding the procedure under Sections 3 and 4.”
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985)
Relevant Facts: A retired dentist invested his life savings in the stock market, only to lose the majority of his money. He subsequently sued the investment company in federal court, alleging violations of the Securities Exchange Act (SEA) and various state statutes. The investment company responded by moving to compel arbitration of the state law claims based on an arbitration clause in the preprinted ‘Customer’s Agreement’, and to stay that arbitration pending the resolution of the non-arbitrable SEA allegations. The district court denied the motion, and the Court of Appeals affirmed.
Question Before The Court: Whether, when a complaint raises both federal and state claims, a federal district court may deny a motion to compel arbitration of the state law claims despite the parties’ agreement to arbitrate their disputes; and whether district courts should decide arbitrable pendant claims when a non-arbitrable federal claim is before them due to the possible collateral estoppel effect that may arise in a subsequent federal proceeding were an arbitration of the pendant claims to occur.
The Opinion: In deciding this case, the Court resolved a circuit split on the issue of how to apply the process of compelling arbitration described in Sections 3 and 4 of the Federal Arbitration Act (FAA). Prior to this case, when faced with this question, some circuits applied the doctrine of intertwining, which provided that where “arbitrable and non-arbitrable claims arise out of the same transaction, and are sufficiently intertwined factually and legally, the District [court] may deny arbitration.” Other circuits held that “the FAA divests the District courts of any discretion regarding arbitration in cases containing both arbitrable and non-arbitrable claims, and instead requires that the court compel arbitration of arbitrable claims when asked to do so.”
The Supreme Court in this case chose the latter interpretation when it held that “even where the result would be the possible inefficient maintenance of separate proceedings in different forums . . . [b]y its terms, the [FAA] leaves no place for the exercise of discretion by a District court, but instead mandates that District courts shall direct the parties to proceed to arbitrate on issues as to which an arbitration agreement has been signed.” The Court reiterated “the preeminent concern of Congress in passing the Act was to enforce private agreements unto which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is piecemeal litigation, at least absent a countervailing policy manifested in another federal statute. By compelling arbitration of state law claims, a district court successfully protects the contracts of the parties and their rights under the FAA.”
Prior to this case, the Supreme Court had never ruled that state law claims were arbitrable under the FAA. With this decision, federal district courts have no discretion to refuse to compel arbitration of state statutory claims if they are deemed to fall within the scope of actions covered within a broadly-written arbitration clause, even if it is presented in a consumer contract of adhesion between an individual and large corporation. By forcing arbitration “on issues as to which an arbitration agreement has been signed,” the Court opened the door for all types of statutory claims to be deemed de facto arbitrable – a move they fully committed to in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), a case they heard oral arguments for just two weeks after issuing the opinion in this case.
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985)
Relevant Facts: An auto dealership sued Mitsubishi Motors under the Sherman Act, a federal anti-trust law. Mitsubishi moved to compel arbitration under an arbitration clause in the contract. Neither party disputed that the arbitration agreement was valid, but the question of arbitrability arose because the contract also contained a choice-of-law clause which provided that the arbitration would occur in Japan. The dealership argued, among other things, that because the Sherman Act is designed to protect businesses like theirs, the federal anti-trust act required a court, not an arbitrator, to enforce it and, as such, the Sherman Act claims were non-arbitrable.
Question Before The Court: Whether claims alleging violations of federal statutes are “arbitrable” under the Federal Arbitration Act.
The Opinion: In a monumental decision, the Court held for the first time that federal statutory claims may be compelled into arbitration, despite the fact that arbitrators hold only the power to enforce contracts, not the law at large. The Court declared, “The ‘liberal federal policy favoring arbitration agreements’ manifested by [the FAA] is at bottom a policy guaranteeing the enforcement of private contractual arrangements: the Act simply creates a body of federal substantive law establishing and regulating a duty to honor an agreement to arbitrate. . . . There is no reason to depart from these guidelines where a party bound by an arbitration agreement raises claims founded on statutory claims.”
The Court continued, “By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits their resolution in an arbitral, rather than a judicial forum. It trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” Indeed, the Court determined that even “the potential complexity” of the antitrust claim at issue “should not suffice to ward off arbitration.” Casting arbitration clauses as “a specialized kind of forum-selection clause that posits not only the sitis of suit but also the procedure to be used in resolving the dispute,” the Court showed little concern for the potential obstacles to civil law enforcement such a restricted forum might present. “The Bremen, [inter alia] established a strong presumption in favor of enforcement of freely negotiated contractual choice-of-forum provisions. . . that presumption is reinforced by the emphatic federal policy in favor of arbitral dispute resolution.”
Ultimately, the Court established that determining the arbitrability of a federal statutory claim only requires a two-step inquiry: first, ascertain whether the parties’ agreement to arbitrate reached the statutory issue; then, upon finding it did, consider whether legal constraints external to the parties’ agreement foreclosed arbitration of those claims. Citing The Bremen, the Court allowed that “[a] party resisting arbitration may attack directly the validity of the agreement to arbitrate. Moreover, the party may attempt to make a showing that would warrant setting aside the forum-selection clause – that the agreement was affected by fraud, undue influence, or overweening bargaining power, that enforcement would be unreasonable and unjust, or that proceedings in the contractual forum will be so gravely difficult and inconvenient that the resisting party will for all practical purposes be deprived of his day in court. But, absent such a showing . . . there is no basis for assuming the forum inadequate or its selection unfair. . . And so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.”
With this decision, all statutory claims – federal and state – are now presumed arbitrable, with a high bar established for challenging arbitration of any statutory claims. Practically speaking, once this decision came down, big, powerful companies started drafting contracts of adhesion that included extremely broad language requiring “all statutory claims” against them to be resolved solely in binding arbitration – a move that essentially allows them to circumnavigate the American judiciary with the stroke of a pen.
Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987)
Relevant Facts: In order to open retirement accounts with a brokerage firm, a couple signed preprinted customer agreements that contained arbitration clauses among the fine print. The customers subsequently filed RICO, securities fraud, and federal anti-trust claims in federal district court against the firm. The company moved to compel arbitration and succeeded in all but the RICO claims. Relying on the Supreme Court’s precedent in Wilko, the appeals court ruled that in addition to the RICO claim, the fraud claims based on the Securities Act were also non-arbitrable.
Question Before The Court: Whether arbitration clauses in consumer contracts of adhesion are enforceable when the underlying claim is based on a federal statute, and what level of burden must be met by the party challenging the arbitrability of the federal statutory claim.
The Opinion: The Court found that RICO and anti-trust claims could be forced into arbitration, regardless of the fact that the arbitration clause was presented in a pre-printed form by the party with superior bargaining power. In so doing, the Court hollowed out its Wilko decision. The Wilko court, in finding claims under the Securities and Exchange Act were non-arbitrable, expressed concerns about the ability for appropriate factfinding in such complex cases, or in those requiring “subjective findings on the purpose and knowledge of the alleged violator.” Moreover, the Wilko court acknowledged that an arbitrator is tasked with enforcing the terms of a contract, not enforcing the law and that arbitrators must make legal determinations “without judicial instruction of the law.” The Wilko Court expressed reservations about the risk of harm that could arise due to the fact that arbitrators could make grave errors in applying the law, but their decisions “are not subject, in the federal courts, to judicial review.” In a stunning display of hubris, the Shearson Court swatted down those concerns by citing its own extremely recent rulings in Mitsubishi Motors, Dean Witter Reynolds, and Moses Cone, providing, “It is difficult to reconcile Wilko’s mistrust of the arbitral process with this Court’s subsequent decisions involving the Arbitration Act. . . . Most of the reasons given in Wilko have been rejected by the Court as a basis for holding claims to be non-arbitrable.”
The Court went on to provide, “Th[e] duty to enforce arbitration agreements is not diminished when a party bound by an agreement raises a claim founded on statutory rights. . . . The [FAA], standing alone, therefore mandates enforcement of agreements to arbitrate statutory claims. Like any statutory directive, the [FAA’s] mandate may be overridden by contrary congressional command. The burden is on the party opposing arbitration, however, to show that Congress intended to preclude waiver of judicial remedies for the statutory rights at issue. If Congress did intend to limit or prohibit waiver of a judicial forum for a particular claim, such an intent will be deducible from the statute’s text or legislative history, or from inherent conflict between arbitration and the statute’s underlying purposes.”
Of course, when it comes to statutes that were passed prior to the 1980’s, it is highly unlikely that Congress would have documented their thoughts on arbitration in the legislative record because the very notion that substantive statutory rights enacted by the legislature to protect consumers and employees could be shuffled out of a judicial forum by some corporate fine print would likely have been unimaginable to them. Still, the Court’s decision here requires people seeking to enforce their statutory rights in a public court to provide non-existent evidence of the then-unthinkable – a requirement that has undoubtedly stymied the enforcement of civil rights, consumer, and workplace protections.
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
Relevant Facts: A married couple signed a “workout” agreement on behalf of their business to settle some pending debts. The agreement contained an arbitration provision. When the debt continued to go unpaid, the creditor filed a claim in arbitration against the business and the married couple as individuals. The couple objected to arbitration, claiming that while the business agreed to arbitrate, they never agreed to it as individuals. The arbitrators deemed themselves able to rule on the merits, and did so in favor of the creditor. The district court upheld the arbitration award, but the appellate court reversed, finding that the question of arbitrability was for a court to decide.
Question Before The Court: Who decides whether a claim is arbitrable – the court or an arbitrator?
The Opinion: The Court held that to determine who decides the question of arbitrability, a court must look to the contract and determine whether the parties addressed the matter directly. If the contract expressly provides for an arbitrator to decide, “then the court’s standard 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. That is to say, the court should give considerable leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances. If, on the other hand, the parties did not agree to submit the arbitrability question itself to arbitration, then the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely, independently.”
According to the Court, “arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration. When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally [ ] should apply ordinary state-law principles that govern the formation of contracts. 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.”
Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)
Relevant Facts: Multiple consumers separately received loans from Green Tree to buy mobile homes. The loan contracts each included a choice of law provision and an arbitration clause. The consumers sued, independently of each other, and Green Tree moved to compel arbitration in each action. The plaintiffs then came together and sought class status. The court granted the class certification and also ordered arbitration. The class plaintiffs won over $10M in arbitration. The defendant appealed, claiming class arbitration was legally impermissible. The state supreme court ruled for the class plaintiffs, holding “that the contracts were silent in respect to arbitration, that they consequently authorized class arbitration, and that arbitration had properly taken that form.”
Question Before The Court: Whether the question of an arbitration clause can be enforced collectively should be determined by a judge or an arbitrator.
The Opinion: Under the facts, a plurality concluded that an arbitrator must determine whether a contract forbids class arbitration. To the Court, the relevant question was what kind of arbitral proceedings the parties agreed to – individual or class? In the Court’s view, the answer is to be determined as a matter of contract interpretation on a case by case basis, something the Court reasoned arbitrators are well situated to resolve. The Court held that because it was not a question of whether arbitration would occur, but what form of arbitration would occur—individual or class—the arbitrator could decide.
The Court further provided, “In certain limited cases, courts assume that the parties intended courts, not arbitrators, to decide a particular arbitration-related matter. These limited instances typically involve . . . 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.”
It is worth noting that the Justices, in speaking about the different types of arbitral proceedings, never questioned the permissibility of class proceedings in arbitration. On the contrary, this opinion reads as though it was a foregone conclusion that class arbitrations are fine so long as the parties agreed to it. This assumption deteriorates in the next few cases, as the Court begins to redefine the very nature of arbitration. In hindsight, you can see what this case truly set the stage for the enforceability of class action bans in forced arbitration clauses. It also set up the Court’s holding in Rent-A-Center, West v. Jackson, 561 U.S. 63 (2010), which established broad acceptance of delegation provisions in forced arbitration clauses.
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
Relevant Facts: Victims of a predatory “payday” lending trap sued the predatory lender, a check cashing company. The documents they signed as part of the predatory loan included a forced arbitration clause. The plaintiffs then filed a class action, alleging usurious interest rates, among other things, which under the law made the contract illegal on its face. The check cashing company invoked the arbitration provision.
Question Before The Court: Whether a court or an arbitrator should consider the claim that a contract containing an arbitration provision is void for illegality.
The Opinion: The Court used precedent to reach its holding: “First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this case, we conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court.”
“It is true,” the Court continued, “that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that [the consumers’] approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum—and resolved it in favor of the separate enforceability of arbitration provisions. We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.”
Stolt-Nielson S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010)
Relevant Facts: Petitioner shipping company entered into a contract with the respondent company, AnimalFeeds, that contained an arbitration clause. Later, AnimalFeeds brought a class action antitrust suit alleging price fixing. With no dispute over whether the claims would be resolved in arbitration, the only question was whether bringing the case as a class was permissible under the contract. Acknowledging that the contract was silent on the issue, the parties agreed to submit the question of whether the arbitration clause allowed for class arbitration to an arbitrator, and selected an arbitration panel. The panel determined that the agreement allowed for class arbitration. However, the district court vacated the award, claiming the arbitrators’ award was made in “manifest disregard” of the law. The appeals court reversed.
Question Before The Court: Whether class arbitration proceedings are permissible under an arbitration agreement that is silent on the matter.
The Opinion: The Court returned to its ruling in Bazzle in order to limit its effect on the ability of arbitrators to permit class arbitration. Noting that only a plurality, not a majority, asserted the position allowing an arbitrator, not a court, to decide whether a contract permits class arbitration, the Court explained, “Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted.”
The Court clarified that, because arbitration is a product of agreement by the parties arising out of a written contract, it is impermissible to require one party to submit to class arbitration if it didn’t agree to do so in the contract: “In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. . . But the relative benefits of class action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes through class-wide arbitration.” The Court concluded, “We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”
This holding made it substantially more difficult for people bound by forced arbitration clauses to hold companies accountable as it effectively siloes each prospective claimant unless their contract expressly provides that class arbitration is permissible. Moreover, since most forced arbitration clauses actually foreclose class actions in a judicial forum, if they speak to the issue at all, this leaves many plaintiffs unable to access class proceedings in any forum. In her dissent, Justice Ginsberg addressed this injustice, averring, “If the Court is right that arbitrators ordinarily are not equipped to manage class proceedings . . , then the claimant should retain the right to proceed in that format in court.”
Rent-A-Center, West, Inc., v. Jackson, 561 U.S. 63 (2010)
Relevant Facts: After a retail salesman filed an employment discrimination claim against his former employer, the company moved to compel arbitration under a forced arbitration clause upon which the worker’s employment had been conditioned. The employee specifically challenged the forced arbitration clause on the grounds of unconscionability, but the forced arbitration clause contained a delegation provision which provided that questions of the clause’s enforceability would be decided by an arbitrator. The district court granted the motion to compel and, because of the delegation provision, ordered the unconscionability question into arbitration. The appeals court reversed in part, holding that when a challenger asserts he cannot meaningfully assent to the agreement, the threshold question of unconscionability is for the court to decide.
Question Before The Court: Whether an arbitrator or a judge shall determine the enforceability of a forced arbitration clause when the agreement includes a delegation provision.
The Opinion: The Court cited its severability rule from Prima Paint in holding that “the delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement. We have recognized that parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy. . . . . [Delegation provisions are] simply an additional, antecedent arbitration agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does any other. . . Application of the severability rule does not depend on the substance of the remainder of the contract. Section 2 operates on the specific ‘written provision’ to ‘settle by arbitration a controversy’ that the party seeks to enforce. Accordingly, unless [a party] challenged the delegation provision specifically, we must treat it as valid . . . and must enforce it,. . . leaving any challenge to the validity of the Agreement as a whole to the Arbitrator.”
The primary effect of this case was summarized in Justice Stevens’ dissent: “A claim that an entire arbitration agreement is invalid will not go to the court unless a party challenges the particular sentences that delegate such claims to the arbitrator, on some contract ground that is unique and particular to the sentences.” In so deciding, the Court gave effect to contracts when the validity of those very contracts is in question. Justice Stevens addressed this problem, saying, inter alia, “I do not think an agreement to arbitrate can ever manifest a clear and unmistakable intent to arbitrate its own validity.”
Arguably, one could go much further in questioning why the FAA is applied to the delegation provision at all. The FAA only applies to “written provision[s] . . . evidencing a transaction involving commerce.” While an arbitration clause may be a part of, but severed from, an underlying contract in interstate commerce—the means by which the FAA applies to them—the same cannot be said for a delegation provision. The contract that contains a delegation provision is the arbitration contract. In Mitsubishi Motors the Court went to great lengths to characterize arbitration contracts as “mere forum-selection clauses.” Even under the broadest interpretation of the Commerce Clause, forum-selection clauses have never been interpreted as contracts in interstate commerce. Because delegation provisions are severed from arbitration agreements, which, again, are not contracts in interstate commerce in and of themselves, it’s questionable that the FAA should apply to matters of their enforceability.
Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S._(2019)(slip opinion)
Relevant Facts: After a distributor’s deal with a manufacturer went bad, the distributor, Archer & White, filed an antitrust suit seeking injunctive relief. Henry Schein, the manufacturer’s successor in interest, invoked an arbitration clause that specified that American Arbitration Association (AAA) rules would govern any applicable disputes. Archer & White objected to arbitration on the basis that the arbitration provision they agreed to expressly excluded suits seeking injunctive relief. Henry Schein argued that by incorporating the AAA rules, which provide that arbitrators may resolve questions of arbitrability, Archer & White had agreed to delegate the resolution of the dispute to an arbitrator. A magistrate agreed, and ruled the question of whether the claim of injunctive relief was arbitrable was for the arbitrator to decide.
Relying on precedent from the U.S. Court of Appeals for the Fifth Circuit, the district court reversed and held that the court could decide the question of arbitrability because the arguments for arbitration were “wholly groundless.” The appellate court affirmed.
Question Before The Court: Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.”
The Opinion: The Court granted certiorari in this case to resolve a circuit split around the question of whether the Federal Arbitration Act allows a “wholly groundless” exception. This exception, where recognized, permitted “the court rather than the arbitrator [to] decide the threshold arbitrability question if, under the contract, the argument for arbitration is wholly groundless.” Relying on its precedent in First Options and Rent-A-Center, the Court found that “the ‘wholly groundless’ exception is inconsistent with the text of the Act and with our precedent.”
The Court reasoned, “Just as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator. . . . If a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.”
In the final paragraph, the Court expressly declined to rule on the question of whether a delegation provision may be incorporated by reference, as Henry Schein had argued at the lower court levels. It remains an open question whether the Court, in the future, will agree that companies can use a reference to for-profit arbitration firm rules in an arbitration clause to implicitly impose delegation provisions.
New Prime Inc. v. Oliveira, 586 U.S._(2019)(slip opinion)
Relevant Facts: A truck driver sued for wage and hour violations. The employer invoked an arbitration clause containing a delegation provision in the employment contract. The driver argued that truck drivers fall within the transportation worker exemption in Section 1 of the Federal Arbitration Act (FAA). The employer argued the driver was an independent contractor, so the exemption didn’t apply.
Question Before The Court: Whether a dispute over applicability of the FAA’s Section 1 “contract of employment” exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and whether the FAA’s Section 1 exemption is applicable to independent contractor agreements.
The Opinion: The Court held that a court should determine whether the Section 1 exception applies, even in cases where an otherwise-valid delegation provision is present. The Court observed that “under the severability principle, [courts] treat a challenge to the validity of an arbitration agreement (or a delegation clause) separately from a challenge to the validity of the entire contract in which it appears,” but “a court may only use Sections 3 and 4 [of the FAA] to enforce a delegation clause if the clause appears in a ‘written provision in . . . a contract evidencing a transaction involving commerce” consistent with Section 2. And only if the contract in which the clause appears doesn’t trigger Section 1’s ‘contract of employment’ exception.”
The Court reasoned, “Just as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator. . . . If a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.”
This ruling appears to be the first constraint the Court has placed on delegation provisions in arbitration clauses since it first embraced them. In doing so, the Court suggested that where the FAA Section 1 “contract of employment” exception is at issue, a court should first review the contract as a whole to determine whether the exception applies. If the court determines it does apply, then the other sections of the FAA cannot be used to compel arbitration. If the court determines the exception does not apply, then the severability doctrine established in Prima Paint, and later applied to delegation provisions in Rent-A-Center, should be applied, and the court must order arbitration as required under the terms of the arbitration clause.
Relying on legislative text and history, the Court also found that the phrase “contract of employment” in Section 1 refers to all contracts to perform work, and is not limited to parties engaged in a formal employer-employee relationship. Under this ruling, the exception applies to independent contractors, and not just to workers classified as employees.
With this clarification, one wonders if there is room to expand the type of a work considered to be “engaged in . . . interstate commerce” to include common 21st Century interstate business transactions conducted primarily through the internet. For example, businesses like Amazon and its affiliates are certainly involved in interstate commerce. Under this decision, it is possible that the workers who support those transactions may also be subject to the Section 1 exception. If this question were to arise in a future claim, under this decision, the answer would be for a court to decide.
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