THE
AMERICAN
REVIEW OF
INTERNATIONAL
ARBITRATION
Vol. 20 No. 2
THE RULES GOVERNING WHO DECIDES JURISDICTIONAL
ISSUES: FIRST OPTIONS v. KAPLAN REVISITED
Steven H. Reisberg*
I. INTRODUCTION
This article addresses one of the fundamental issues at the core of arbitration
jurisprudence: Who — the court or the arbitrator — is to decide whether a person
is required to arbitrate a particular dispute? As will be shown, the rules that
govern the “who is to decide” question once were well defined. Today, however,
there exists significant confusion as to how a court is to decide which forum, the
court or the arbitrator, has the jurisdiction to decide this threshold issue. The
current confusion can be traced directly to the Supreme Court’s decision in First
Options of Chicago, Inc. v. Kaplan.1 One goal of this article is to identify the
well-defined legal rules that once governed the analysis of this threshold question.
This article will also show how the use by the Supreme Court of the term
“arbitrability” in First Options has introduced significant confusion into the law of
arbitration and obscured these once-clear governing rules.
Whether a party is required to submit a particular dispute to arbitration may
contain within it two completely distinct legal issues. First, a party may be
objecting to arbitration on the ground that no valid, enforceable arbitration
agreement exists between the parties. Second, and alternatively, a party may be
arguing that the particular dispute does not fall within the scope of the arbitration
agreement. The distinction between these two objections to arbitration is critical,
because each is governed by its own separate set of legal rules that govern “who,”
meaning which forum — the court or the arbitrator — is to adjudicate such
objection to arbitration.
Courts repeatedly recognize that the issue of who has the jurisdiction to
decide the “question of arbitrability” is a threshold issue. However, the use of the
term “arbitrability” in the framing of this question has introduced and is the source
of substantial confusion. This is because the term “arbitrability,” as used by
courts and commentators alike, can refer to both of the two above-noted very
different objections to arbitration. If there is no valid and enforceable arbitration
agreement between the parties, then neither can be required to arbitrate the
dispute. Courts use the phrase “the question of arbitrability” to refer to such
arguments challenging the existence, validity or enforceability of an arbitration
* Steven H. Reisberg is a partner at Willkie Farr & Gallagher LLP. Special thanks
to Emma-Ann Deacon, Esq. and Joshua Nahum, Esq. for their assistance with the
preparation of this article. © Steven H. Reisberg 2009.
1
514 U.S. 938 (1995). See Alan Scott Rau, The Arbitrability Question Itself, 10
AM. REV. INT’L ARB. 287, 289 (1999) (“There are certainly defects in craftsmanship in
Kaplan — but it is nevertheless bemusing that so many judges and scholars have tied
themselves into knots trying to make sense of it.”).
The American Review of International Arbitration (ARIA), v20/no 2, 159-190, copyright 2010 ©JurisNet LLC
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agreement. But the term “arbitrability” is also used to refer to an objection
asserting that the specific dispute is not within the scope of the arbitration clause.
This is an issue about the interpretation of the terms of the arbitration agreement.
Importantly, such a “scope” objection does not question the existence, validity or
enforceability of the arbitration agreement itself. Parties in a given case, of
course, may assert both types of objection.
The use of the same term “arbitrability” to refer to these two very different
types of objections to arbitration would not be a problem if the same rules of
decision applied to each. But that is not the case. These two fundamentally
different questions are governed by their own separate sets of legal rules that
determine who, the court or the arbitrator, is to decide the issue on the merits. Use
of the single term “arbitrability” hides all this from view.
As will be shown below, the rules that govern “who” (court or arbitrator) has
the responsibility to address each of these two threshold issues are clearly
identifiable from the case law. The rules are small in number and are different for
each of these two types of objections. An express recognition and articulation of
these rules can clarify the analysis to be used when deciding which forum has the
authority to rule on a party’s objection that (i) it is not bound by an arbitration
agreement or (ii) the particular dispute is not one within the scope of the subjects
it has agreed to resolve by arbitration.
This article examines the current state of the law on these issues, including
conflicts between the various courts, and provides what hopefully will be some
practical guidance for courts and practitioners alike as to how these issues should
be resolved.
II. THE LEGAL RULES GOVERNING THE ALLOCATION OF
JURISDICTION BETWEEN THE COURTS AND ARBITRAL TRIBUNALS
In a trio of cases, the Supreme Court set forth certain fundamental principles
of our arbitration jurisprudence: John Wiley & Sons, Inc. v. Livingston,2 Prima
Paint Corp. v. Flood & Conklin Mfg. Co.,3 and AT&T Technologies, Inc. v.
Communications Workers of America.4 An examination of these cases is
important because the principles established therein allow for the identification of
a clear set of traditional rules for determining who is to resolve jurisdictional
challenges to an arbitration. As will be shown below, a return to these
fundamental rules will clear away the confusion caused by First Options.
These three Court decisions make it clear that there are two different
fundamental threshold questions that a court must address in every arbitration
case. These are: (1) Did the parties enter into a contractually valid arbitration
agreement? and (2) Does the specific dispute fall within the scope of the
arbitration agreement? The first question covers challenges to the existence,
2
3
4
376 U.S. 543 (1964).
388 U.S. 395 (1967).
475 U.S. 643 (1986).
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THE RULES GOVERNING WHO DECIDES JURISDICTIONAL ISSUES
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validity or enforceability of the arbitration agreement. The second question,
which is based on the assumption that a valid arbitration agreement has been
found to exist, concerns the scope of the subject matter that the parties have
agreed is to be resolved by arbitration. Most importantly, these Court decisions
make it clear that each question is subject to different rules as to the issue of who
— the court or the arbitrator — has the jurisdiction to rule on the merits of the
issues.
A. The Existence of an Arbitration Agreement
In John Wiley & Sons Inc. v. Livingston,5 John Wiley & Sons, Inc. (“Wiley”)
had acquired Interscience Publishers, Inc. (“Interscience”), with the result that
Interscience ceased doing business as a separate entity. At the time of the merger,
Interscience had about 80 employees, approximately 40 of whom were represented
by a union (the “Union”) pursuant to a collective bargaining agreement (the
“Agreement”). The Agreement did not contain any express provision making it
binding on successors of Interscience, but it did contain an arbitration clause.6
Wiley was the much larger company employing about 300 employees, none
of whom were represented by a union. The Union contended that the Agreement
was binding on Wiley, and one week before the expiration date of the Agreement,
the Union commenced an action to compel arbitration of certain disputes relating
to the 40 former Interscience employees represented by the Union. Wiley
contended that it was not subject to arbitration because it was not a signatory to
the Agreement and that, in any event, the merger terminated the collective
bargaining agreement.7
The Court stated the issue with clarity: “The threshold question in this
controversy is who shall decide whether the arbitration provisions of the collective
bargaining agreement survived the Wiley-Interscience merger, so as to be
operative against Wiley.”8 In other words, “[h]ere, the question is whether Wiley,
which did not itself sign the collective bargaining agreement on which the Union’s
claim to arbitration depends, is bound at all by the agreement’s arbitration
provision.”9
The Court was equally clear in stating the answer: “Past cases leave no
doubt” that the threshold issue of whether a non-signatory is bound by an
arbitration clause is for the courts, not the arbitrators.10 As the Court explained,
5
376 U.S. 543 (1964).
Id. at 544.
7
Id. at 545.
8
Id. at 546 (emphasis added).
9
Id. at 547.
10
Id. at 546. The Court noted that the decision by the Court of Appeals below was
not clear on this point, as at one point the Court of Appeals decision indicated that the
question of whether Wiley was obligated to arbitrate was for the arbitrators. Id. at 547
n.1.
6
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this must be the case because 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.”11 “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.”12
B. The Severability of the Arbitration Agreement
Prima Paint Corp. v. Flood & Conklin Mfg. Co.13 establishes, among other
things, the severability of the arbitration agreement from the contract as a whole.
Prima Paint Corporation (“Prima Paint”) and Flood & Conklin Manufacturing
Company (“F & C”) had entered into a consulting agreement, following the
purchase by Prima Paint of F & C’s paint business. The consulting agreement
contained “a broad arbitration clause, which read in part: ‘Any controversy or
claim arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration in the City of New York, in accordance with the rules then
obtaining of the American Arbitration Association . . . .’”14 After Prima Paint
failed to make a payment due under the consulting agreement, F & C served a
notice of intent to arbitrate.15 Prima Paint, in response, filed suit in District Court
seeking: (i) rescission of the Consulting Agreement on the basis of alleged
fraudulent inducement; and (ii) an order enjoining F & C from proceeding with
the arbitration.16
The Court stated that the question before it was “whether a claim of fraud in
the inducement of the entire contract is to be resolved by the federal court, or
whether the matter is to be referred to the arbitrators.”17
The Court held that “Congress has provided an explicit answer” and “[t]hat
answer is to be found in § 4 of the [Federal Arbitration] Act.”18 Section 4 of the
Federal Arbitration Act (the “FAA”) provides, in part:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States district
court . . . for an order directing that such arbitration proceed . . . . The court shall
hear the parties, and upon being satisfied that the making of the agreement for
arbitration or the failure to comply therewith is not in issue, the court shall make
11
Id. at 547.
Id.
13
388 U.S. 395 (1967).
14
Id. at 398.
15
Id.
16
Id. at 398-99.
17
Id. at 402. The Court of Appeals had held that a “claim of fraud in the inducement
of the contract generally — as opposed to the arbitration clause itself — is for the
arbitrators and not for the courts.” Id. at 400.
18
Id. at 403.
12
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an order directing the parties to proceed to arbitration in accordance with the
terms of the agreement . . . . If the making of the arbitration agreement or the
failure, neglect, or refusal to perform the same be in issue, the court shall proceed
summarily to the trial thereof. If no jury trial be demanded by the party alleged
to be in default, or if the matter in dispute is within admiralty jurisdiction, the
court shall hear and determine such issue. . . . If the jury find that an agreement
for arbitration was made in writing and that there is a default in proceeding
thereunder, the court shall make an order summarily directing the parties to
proceed with the arbitration in accordance with the terms thereof.19
The Court stated that under Section 4 of the FAA,20 “the federal court is
instructed to order arbitration to proceed once it is satisfied that ‘the making of the
agreement for arbitration or the failure to comply [with the arbitration agreement]
is not in issue.’”21 The Court noted that Section 4 restricted the issues that the
district court may resolve prior to ordering arbitration, to those that challenge “the
making of the agreement for arbitration.” The Court explained:
Accordingly, if the claim is fraud in the inducement of the arbitration clause itself
— an issue which goes to the “making” of the agreement to arbitrate — the
federal court may proceed to adjudicate it. But the statutory language does not
permit the federal court to consider claims of fraud in the inducement of the
contract generally.22
In so holding, the Court further held that this rule was a matter of federal law,
applicable to all contracts within the coverage of the FAA.23
This rule of federal law recognizes that the arbitration clause is to be treated as
separate and severable from the contract as a whole. Accordingly, under the FAA,
a court prior to the arbitration “may consider only issues relating to the making
and performance of the agreement to arbitrate.”24 As the arbitration provision is
severable and can be considered independently from the contract as a whole, this
means that under federal law a court does not have jurisdiction to rule on a claim
of fraud in the inducement of the entire contract, unless the claim is made that the
fraud was directed to the arbitration clause itself.25
19
9 U.S.C. § 4 (2009) (emphasis added).
9 U.S.C. § 1 et seq.
21
Prima Paint, 388 U.S. at 403.
22
Id. at 403-04 (footnote omitted).
23
Id. at 400-01. See Southland Corp. v. Keating, 465 U.S. 1, 12-17 (1984); Buckeye
Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006) (Prima Paint and
Southland established that “as a matter of substantive federal arbitration law, an
arbitration provision is severable from the remainder of the contract” and “this arbitration
law applies in state as well as federal courts”).
24
Prima Paint, 388 U.S. at 404.
25
Id. at 403-04.
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C. The Scope of the Arbitration Agreement
AT&T Technologies, Inc. v. Communications Workers of America26 addresses
the issue of how the courts are to handle the question of whether a particular
dispute falls within the scope of the subjects the parties had agreed would be
subject to arbitration. There was no dispute about whether AT&T Technologies,
Inc. (“AT&T”) was a signatory to and bound by the collective bargaining
agreement. It was accepted that AT&T and the Communications Workers of
America (the “Union”) were parties to a collective bargaining agreement, which
contained an arbitration clause.27 There was no challenge to the existence,
validity or enforceability of the agreement to arbitrate.
In AT&T, Article 8 of the collective bargaining agreement provided that
“differences arising with respect to the interpretation of this contract or the
performance of any obligation hereunder” are to be referred to a mutually
agreeable arbitrator.28 However, Article 8 further provided that it (Article 8)
“does not cover disputes” which are expressly “excluded from arbitration by other
provisions of this contract.”29 Notably, Article 9 of the agreement stated that
certain management functions of AT&T, including, among other things, “the
hiring and placement of employees and the termination of employment,” were
“not subject to the provisions of the arbitration clause.”30 Finally, Article 20 of
the agreement stated that when lack of work necessitated layoffs, there was a
particular order in which employees were to be laid off.31
The Union filed an arbitration claim challenging AT&T’s decision to lay off
79 installers. The Union claimed the planned layoffs violated Article 20 of the
agreement because there was no lack of work necessitating the layoffs.32 AT&T
argued it could not be compelled to arbitrate such a claim because Article 9 of the
agreement made it clear that the Company’s decision to lay off workers was a
subject excluded from the arbitration clause.
Thus, the issue before the Court was whether this particular dispute fell within
the scope of the parties’ agreement to arbitrate. The Court stated that the
“principles necessary to decide this case are not new,” noting that they could be
gleaned from the series of cases known as the Steelworkers Trilogy.33
26
475 U.S. 643 (1986).
Id. at 644-45.
28
Id. at 645.
29
Id.
30
Id.
31
Id. at 645 n.3.
32
Id. at 645-46.
33
Id. at 648. These cases are United Steelworkers of America v. American
Manufacturing Co., 363 U.S. 564 (1960); United Steelworkers of America v. Warrior &
Gulf Navigation Co., 363 U.S. 574 (1960); and United Steelworkers of America v.
Enterprise Wheel & Car Corp., 363 U.S. 593 (1960). In each of the Steelworker Trilogy
cases, there was no dispute about the formation, existence, validity or enforceability of the
27
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The Court in AT&T then set forth four general principles or rules, which have
been reaffirmed in numerous subsequent cases.
1. The first principle is that “‘arbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not
agreed so to submit.’ This axiom recognizes the fact that arbitrators
derive their authority to resolve disputes only because the parties have
agreed in advance to submit such grievances to arbitration.”34
2. “The second rule, which follows inexorably from the first, is that the
question of arbitrability — whether a collective-bargaining agreement
creates a duty for the parties to arbitrate the particular grievance — is
undeniably an issue for judicial determination.” “Unless the parties
clearly and unmistakably provide otherwise, the question of whether the
parties agreed to arbitrate [a particular grievance] is to be decided by the
court, not the arbitrator.”35 It is contended that this exception to judicial
determination applies only to the issue of whether the parties agreed to
arbitrate a “particular grievance.” It is only the issue of scope, not the
existence of an arbitration agreement, that the parties can decide to assign
to the arbitration.
3. The third principle is that “in deciding whether the parties have agreed to
submit a particular grievance to arbitration, a court is not to rule on the
potential merits of the underlying claims.”36 The merit of the grievance
“is to be decided, not by the court asked to order arbitration, but as the
parties have agreed, by the arbitrator.”37
4. The fourth rule is that the court, in determining whether an issue is within
the scope of an arbitration clause, should apply a presumption that the
dispute is one the parties had agreed to arbitrate. This “presumption of
arbitrability” (which is applied to the issue of the scope of the arbitration
clause), the Court stated, “is particularly applicable where the clause is as
broad as the one employed in this case, which provides for arbitration of
‘any differences arising with respect to the interpretation of this contract
or the performance of any obligation hereunder . . . .’”38 This
presumption, however, may be rebutted, but only if “it may be said with
positive assurance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute.”39
arbitration agreement. Instead, the issue was whether a particular dispute was within the
scope of the arbitration agreement.
34
AT&T, 475 U.S. at 648-49 (citation omitted).
35
Id. at 649 (emphasis added).
36
Id.
37
Id. at 649-50.
38
Id. at 650.
39
Id.
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The Court in AT&T, in applying these four rules to the facts before it, held
that “it is evident that the Seventh Circuit erred in ordering the parties to arbitrate
the arbitrability question.”40 But it is critical to note that by “arbitrability
question,” the Court was referring to whether or not the particular dispute fell
within the scope of the arbitration agreement. There was no challenge in AT&T to
the existence or the “making” of an arbitration agreement between the parties.
The Court held that it was for the court, not the arbitrators, “to determine
whether the parties intended to arbitrate grievances concerning layoffs predicated
on a ‘lack of work’ determination by the Company.”41 In other words, the Court
held that it is for the courts to decide the threshold question of whether this
particular dispute is “subject to the arbitration clause.”42 As this was an issue that
should have been decided by the District Court and reviewed by the Court of
Appeals, the case was remanded.43
D. The Rationale Behind These Rules
These Court decisions established that there are two different threshold issues
that may arise in an arbitration case. If the objection is a challenge to the
existence of a valid arbitration agreement, then this objection must without
exception be decided by the courts.44 If the objection, however, focuses on
whether the specific dispute falls within the scope of the arbitration agreement,
then this issue is presumptively for the court to decide, but subject to an important
exception: whether a specific dispute falls within the scope of an arbitration
agreement may be assigned by the parties in their arbitration agreement to the
arbitrator for determination, where “the parties clearly and unmistakably” have so
provided.45
This framework for distinguishing between these two threshold issues was
firmly embedded in the law of arbitration.46 Unfortunately, confusion has arisen
40
Id. at 651.
Id.
42
Id. at 652.
43
Id. at 651-52.
44
Id. at 648-49.
45
Id. at 649.
46
See, e.g., Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005)
(“A motion to compel arbitration calls for a two-step inquiry into (1) whether a valid
agreement to arbitrate exists and (2) whether the particular dispute falls within the scope
of that agreement”) (citations omitted). Accord: Cap Gemini Ernst & Young, U.S., L.L.C.
v. Nackel, 346 F.3d 360, 365 (2d Cir. 2003) (“[T]he district court must first determine two
threshold issues that are governed by state rather than federal law: (1) Did the parties
enter into a contractually valid arbitration agreement? and (2) If so, does the parties’
dispute fall within the scope of the arbitration agreement?”); Sherer v. Green Tree
Servicing LLC, 548 F.3d 379, 381 (5th Cir. 2008) (“First, we ask if the party has agreed
to arbitrate the dispute . . . . That first step itself contains two questions: (1) is there a
valid agreement to arbitrate the claims and (2) does the dispute in question fall within the
41
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THE RULES GOVERNING WHO DECIDES JURISDICTIONAL ISSUES
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in the law of arbitration because the courts in their struggle to apply First Options
have drifted away from this fundamental analytical framework.
1. The Reason Why the Court, and Not the Arbitrator, Must Always Decide
Any Challenge to Whether a Valid and Enforceable Arbitration
Agreement Exists Between the Parties
The rule that any challenge to the existence of a binding arbitration agreement
may not, under any circumstances, be referred by the court to the arbitrators for
decision47 is dictated by the rules set forth in the Court’s decisions in Wiley, Prima
Paint and AT&T for two independent reasons.
First, this result is required because of the application of the fundamental
arbitration law principle that the “duty to arbitrate being of contractual origin, a
compulsory submission to arbitration cannot precede judicial determination that
the [arbitration] agreement does in fact create such a duty.”48 That the court must
decide if a party is bound by an arbitration agreement before it can compel a party
to arbitration also is a matter of clear logic. As the Court in Wiley explained, a
person “cannot be compelled to arbitrate if an arbitration clause does not bind it at
all.”49
Where the validity of the arbitration contract itself is challenged, such contract
cannot serve as the basis for giving any power to the arbitrator. This has been
recognized by several courts of appeal. As the Third Circuit explained in China
Minmetals, “[a]fter all, a contract cannot give an arbitral body any power, much
scope of that arbitration agreement.”) (citations omitted); Drexel Burnham Lambert, Inc.
v. Mancino, 1991 U.S. App. LEXIS 30181, at *5 (6th Cir. Dec. 19, 1991) (“[A] court’s
review is limited to two issues: (1) whether an express written agreement to arbitrate the
subject matter of the present dispute exists between the parties, and (2) if so, whether the
agreement to arbitrate has been breached”); Faber v. Menard, Inc., 367 F.3d 1048, 1052
(8th Cir. 2004) (“We have made clear that when reviewing an arbitration clause, we ask
only (1) whether there is a valid arbitration agreement and (2) whether the particular
dispute falls within the terms of that agreement”); Cox v. Ocean View Hotel Corp., 533
F.3d 1114, 1119 (9th Cir. 2008) (“[T]he FAA limits courts’ involvement to determining
(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement
encompasses the dispute at issue”) (quotations and citations omitted).
47
After the dispute has arisen a party may elect to have this issue decided by the
arbitrators. This is one reason why the principle of kompetenz-kompetenz expressly
recognized in the rules of many arbitral organizations is important. See William W. Park,
Determining Arbitral Jurisdiction: Allocation of Tasks Between Courts and Arbitrators, 8
AM. REV. INT’L ARB. 133, 140 (1997). However, in this situation the court is enforcing
the parties’ separate and undisputed post-dispute agreement to submit the issue to the
arbitrator. Absent such post-dispute express consent, a party is entitled to a judicial
adjudication of this issue. See China Minmetals Materials Imp. & Exp. Co. v. Chi Mei
Corp., 334 F.3d 274, 287-88 (3d Cir. 2003).
48
Wiley, 376 U.S. at 547.
49
Id.
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less the power to determine its own jurisdiction, if the parties never entered into
it.”50 Similarly, in Sphere Drake Insurance Ltd. v. All American Insurance Co.,51
the Seventh Circuit explained that
a person who has not consented (or authorized an agent to do so on his behalf)
can’t be packed off to a private forum. Courts have jurisdiction to determine
their jurisdiction not only out of necessity . . . but also because their authority
depends on statutes rather than the parties’ permission. Arbitrators lack a
comparable authority to determine their own authority because there is a noncircular alternative (the judiciary) and because the parties do control the
existence and limits of an arbitrator’s power. No contract, no power.52
In Sandvik AB v. Advent International Corp.,53 for example, Advent
contended that the agent who signed the agreement on its behalf lacked authority
to do so. The Third Circuit held that this was an issue for the court, because
“[e]ven under the severability doctrine, there may be no arbitration if the
agreement to arbitrate is nonexistent.”54
“[B]ecause an ‘arbitrator’s jurisdiction is rooted in the agreement of the
parties,’ a party who contests the making of a contract containing an arbitration
provision cannot be compelled to arbitrate the threshold issue of the existence of
an agreement to arbitrate. Only a court can make that decision.”55 The issue
cannot be deferred by the court to the arbitrator because “[t]here would however
be a severe problem of bootstrapping if a party to a contract could be forced to
arbitrate the question whether he had been coerced or deceived into agreeing to
arbitrate disputes arising under the contract.”56 In short, no contract, no power.
The second reason why the court, and not an arbitrator, must decide this
challenge by a party to arbitration is that such result is required by statute,
specifically the FAA. As the Court held in Prima Paint, the FAA requires that a
court prior to ordering a party to arbitration must be “satisfied that the making of
50
334 F.3d at 288.
256 F.3d 587 (7th Cir. 2001).
52
Id. at 591.
53
220 F.3d 99 (3d Cir. 2000).
54
Id. at 101.
55
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1140-41
(9th Cir. 1991) (citation and footnote omitted)
56
Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 869 (7th Cir. 1985). See William
W. Park, The Arbitrator’s Jurisdiction to Determine Jurisdiction, in INTERNATIONAL
ARBITRATION 2006: BACK TO BASICS?, ICCA CONGRESS SERIES NO. 13 at 130 (Albert Jan
van den Berg ed., 2007) (“A contract clause purporting to give arbitrators power to
determine their own authority does not, in itself, insulate from judicial review a decision
to add a party that never agreed to arbitrate. The mere narration or recital of the
arbitrator’s power on a printed form cannot be confused with a genuine grant of authority.
The suggestion that arbitrators can determine their own jurisdiction [in such situations]
brings to mind the picture of Baron Münchhausen pulling himself up by his own pigtail.”).
51
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the agreement for arbitration . . . is not in issue.”57 Section 4 requires that where
the making of the agreement for arbitration is disputed the court “shall proceed
summarily to the trial thereof.” Indeed, Section 4 provides that the person
asserting such challenge has the right to have that issue tried before a jury.58
This issue of “the making of the agreement for arbitration” includes any
challenge to the existence, validity or enforceability of the arbitration agreement.
This conclusion that any challenge to the existence, validity or enforceability
of the arbitration agreement is a challenge to “the making of the agreement for
arbitration” within the scope of Section 4 is required by Section 2 of the FAA.
Section 2 addresses the “Validity, irrevocability and enforcement of agreements to
arbitrate” and provides, in part, as follows:
A written provision in any maritime transaction or a contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter
arising out of such contract or transaction . . . shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.59
A claim of fraud in the inducement of an arbitration clause was found to be an
issue concerning the “making of the agreement for arbitration.” In Prima Paint,
the Court held that a “claim [of] fraud in the inducement of the arbitration clause
itself” is “an issue which goes to the ‘making’ of the agreement to arbitrate,” and
so “the federal court may proceed to adjudicate it.”60 Fraud in the inducement of
the arbitration clause is an example of “save upon such grounds as exist at law or
in equity for the revocation of any contract.”61 That the meaning of the term
“agreement” as used in Section 4 (“upon being satisfied that the making of the
agreement for arbitration . . . is not in issue”) should be interpreted with reference
to Section 2 of the FAA, is also supported by the Court’s recent decision in Arthur
Anderson LLP v. Carlisle,62 where the court relied on the meaning of the term
“agreement” in Section 2 in defining the meaning of “agreement” referred to in
Section 3 of the FAA.
In other words, in order to invoke the power of the FAA to compel a party to
arbitrate a dispute, a court must be sure that there is no issue as to the “making” of
the agreement to arbitrate. Agreements to arbitrate under the FAA do not include
contracts that may be revoked upon “such grounds as exist at law or in equity for
the revocation of any contract.”63 As the Court held in Southland Corp. v.
57
See 9 U.S.C. § 4; Prima Paint, 388 U.S. at 403.
See 9 U.S.C. § 4 (“Where such an issue is raised, the party alleged to be in default
may . . . demand a jury trial of such issue”).
59
9 U.S.C. § 2 (emphasis added).
60
388 U.S. at 403-04.
61
9 U.S.C. § 2.
62
129 S. Ct. 1896 (2009).
63
9 U.S.C. § 2.
58
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Keating,64 “[w]e discern only two limitations on the enforceability of arbitration
provisions governed by the Federal Arbitration Act: they must be part of a written
. . . contract . . . and such clauses may be revoked upon ‘grounds as exist at law
or in equity for the revocation of any contract.’”65
2. The Rules and Reasons Governing Why a Dispute About the Scope of an
Arbitration Agreement Is Presumptively for the Court, but May Be
Assigned by the Parties to the Arbitrator for Decision
The second threshold issue is whether the particular dispute between the
parties is within the scope of the arbitration obligation. This question does not
address whether there is a valid, binding and enforceable arbitration agreement
between the parties. In fact, the question presumes that such inquiry has already
been resolved.66 Importantly, because this second threshold question presumes
that an arbitration agreement exists, it can be made subject to a different set of
rules.
The Court has identified rules that are to be used to determine “who” is to
decide whether a particular dispute falls within the scope of an arbitration
agreement.67
The first rule is that whether an arbitration agreement “creates a duty for the
parties to arbitrate the particular grievance — is undeniably an issue for judicial
determination.”68 This rule follows from the fundamental principle that
“arbitration is a matter of contract and a party cannot be required to submit to
arbitration any dispute which he has not agreed to so submit.”69 “This axiom
recognizes the fact that arbitrators derive their authority to resolve disputes only
because the parties have agreed in advance to submit such grievances to
arbitration.”70
This first rule is subject to an important exception. The foundation for the
exception is that a dispute about scope does not challenge the existence of an
arbitration agreement. In other words, the parties are disputing only the identity
of the grievances that are to be submitted to arbitration. The issue thus becomes
64
465 U.S. at 10-11.
Quoting 9 U.S.C. § 2.
66
See Wiley, 376 U.S. at 547 (“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
had 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.”) (emphasis
added).
67
Because the FAA “creates a body of federal substantive law,” each of these rules
is applicable in state and federal courts. Southland, 465 U.S. at 12.
68
AT&T, 475 U.S. at 649 (emphasis added).
69
Id. at 648.
70
Id. at 648-49.
65
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what the scope is of the authority that the parties have bestowed upon the
arbitrators.
This exception gives rise to the second rule. As the Court stated in AT&T:
“Unless the parties clearly and unmistakably provide otherwise, the question of
whether the parties agreed to arbitrate [a particular grievance] is to be decided by
the court, not the arbitrator.”71 Put the other way, the second rule is that where the
court finds that parties have clearly and unmistakably provided the arbitrators with
the authority to determine whether a particular issue is within the scope of the
arbitration agreement, then that issue is to be decided by the arbitrators.
This second rule recognizes that because a binding arbitration agreement has
already been found to exist, there now is a legally binding document in which
arbitrators have been given some power by the parties. Therefore, it is now
possible to ask what “the parties clearly and unmistakably” have agreed should be
decided by the arbitrators. In short, the question of whether the parties have
“clearly and unmistakably provided otherwise,” can now be posed either because
the court has separately determined or the parties have conceded that there is a
binding arbitration agreement. In the absence of a court determination that there
is a binding arbitration agreement, there is no “agreement” for a court to examine
in order to find any “clear and unmistakable” statement of the parties’ intent.
The third rule is that “any doubts concerning the scope of arbitrable issues
should be resolved in favor of arbitration.”72 This rule is a reflection of the strong
federal policy favoring arbitration.73 As the Court explained:
The Arbitration Act establishes 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.74
A fourth rule concerns the retained power of the court. Even where the court
has determined that the parties have “clearly and unmistakably” agreed that any
question as to the scope of the arbitration agreement should be decided by the
arbitrators, the court retains the power to decide this issue. This retained power is
to be used in only one narrow circumstance: the court may decline to order that
the dispute about the scope of an arbitration clause be determined by the
arbitrator if and only if “it may be said with positive assurance that the arbitration
clause is not susceptible of an interpretation that covers the asserted dispute.”75
As the Federal Circuit held in Qualcomm Inc. v. Nokia Corp.,76 where a court
has concluded that the parties to the agreement did “clearly and unmistakably
71
72
73
74
75
76
Id. at 649.
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
Id. at 24-25; see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991).
Moses H. Cone, 460 U.S. at 24-25.
AT&T, 475 U.S. at 650.
466 F.3d 1366, 1371 (Fed. Cir. 2006).
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intend to delegate the power to decide arbitrability to an arbitrator, then the court
should perform a second, more limited inquiry to determine whether the assertion
of arbitrability is ‘wholly groundless.’” Where the court, after performing such
second, more limited inquiry can say “with positive assurance” that the arbitration
clause is not susceptible to an interpretation that covers the asserted dispute, it
need not refer the matter to the arbitrator.77 As the Federal Circuit explained:
“We believe that the wholly groundless inquiry” serves to prevent “a party from
asserting any claim at all, no matter how divorced from the parties’ agreement” to
force an arbitration.78
E. A Summary of the Fundamental Arbitration Rules That Govern the Analysis of
Whether a Party Is Required to Submit a Dispute to Arbitration
A clear set of rules can be derived from the Supreme Court decisions as to
how a court is to approach and evaluate a case where a party raises an objection to
the arbitration. These rules, which constitute a paradigm of arbitral jurisprudence,
are as follows:
1. There are two threshold issues that a court must decide in connection with
any case that has an arbitration clause. Question 1: Did the parties enter
into a valid, binding and enforceable arbitration agreement? Question 2:
If so, does the specific dispute fall within the scope of that arbitration
agreement?
2. The first question of whether the parties are bound by an agreement to
arbitrate is a matter to be decided by the court — in all cases and without
exception. We will discuss below the types of challenges that are
considered to go to the existence of a binding arbitration agreement.
3. The second question of whether the specific dispute falls within the scope
of the subjects that the parties agreed were to be resolved by arbitration is,
as a general rule, to be decided by the court (but this general rule is
subject to an important exception).
4. When the court is making the decision as to the scope of the arbitration
clause, “any doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration.”79 This is because of the strong federal
77
See Woodcrest Nursing Home v. Local 144, 788 F.2d 894, 898 (2d Cir. 1986);
Concourse Village Inv. v. Local 32E, Serv. Employees Int’l Union, 822 F.2d 302, 304 (2d
Cir. 1987) (same).
78
Qualcomm, 466 F.3d at 1373 n.5; see Dream Theatre, Inc. v. Dream Theater, 21
Cal. Rptr. 3d 322, 326 (Cal. Ct. App. 2004) (“wholly groundless”).
79
Moses H. Cone, 460 U.S. at 24-25.
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policy favoring arbitration. This is a matter of the federal substantive law
under the FAA and is applicable in state and federal courts.80
5. The general rule that a court is to decide whether a dispute falls within the
scope of the arbitration clause is subject to an important exception. The
arbitrator, and not the court, will decide the question of whether a specific
dispute falls within the scope of the arbitration clause if the court finds
that the parties themselves have “clearly and unmistakably” assigned this
as an issue to be decided by the arbitrator.81 The ability to find such
“clear and unmistakable” evidence of intent presupposes that the court has
already determined, or it has been conceded, that a binding arbitration
agreement exists between the parties.
6. Finally, the court need not refer to the arbitrator a question as to the scope
of an arbitration clause — even where the court has found clear and
unmistakable evidence of the parties’ intent to do so — if the court can
say “with positive assurance that the arbitration clause is not susceptible
of an interpretation that covers the asserted dispute.”82 In other words, the
court need not refer this issue to the arbitrators for decision where the
assertion that a specific dispute is within the scope of the arbitration
clause is “wholly groundless.”83
It is important to note that the terms “arbitrability” or the “question of
arbitrability” are never used in any of these statements of the fundamental laws of
arbitration. This is because the term “arbitrability” masks the crucial distinction
between objections that challenge whether a valid arbitration agreement exists,
and objections that challenge whether a specific dispute falls within the scope of
the arbitration agreement. As noted above, the rules of decision as to how to
answer these questions are not the same. The use of the term the “question of
arbitrability” is to be avoided because its ambiguity obscures recognition that
there are, in fact, two separate and independent questions, each of which is
governed by its own set of decisional rules.
III. THE SERIOUS PROBLEMS CREATED BY THE
MISINTERPRETATION OF FIRST OPTIONS v. KAPLAN
The current confusion over how courts should decide which objections to
arbitration are to be decided by the court — and which may be decided by the
arbitrator — is directly traceable to First Options of Chicago, Inc. v. Kaplan.84
The facts of First Options concern the Kaplans’ challenge to the existence of any
80
81
82
83
84
See Southland, 465 U.S. at 12-13.
AT&T, 475 U.S. at 649.
Id. at 650; see Concourse Village, 822 F.3d at 304.
See Qualcomm, 466 F.3d at 1371.
514 U.S. 938 (1995).
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arbitration agreement between themselves and First Options of Chicago.
However, there are extensive dicta in First Options that discuss how a court is to
resolve challenges to the scope of an arbitration clause. The unfortunate use of
the term “arbitrability”85 in the First Options decision masks the critical
distinction between the two. As a result, since First Options— as will be shown
— many courts have applied rules governing objections to the scope of an
arbitration clause to cases where the objection is to the existence of an arbitration
agreement, with unfortunate results.
The First Options Decision
First Options arose from a dispute between First Options of Chicago, Inc.
(“First Options”) and MK Investments Inc. (“MKI”), which was owned by
Manuel and Carol Kaplan.86 The dispute centered on a workout arrangement for
debts owed by MKI and the Kaplans to First Options which were embodied in
four separate documents, whose signatories were not the same. Only one of the
four documents contained an arbitration clause. At one point, First Options
exercised certain rights against MKI and demanded immediate payment of the
entire MKI debt, and insisted that the Kaplans personally pay any deficiency.87
When these demands went unsatisfied, First Options filed a demand for
arbitration against both MKI and the Kaplans with the Philadelphia Stock
Exchange.
MKI, which had signed the only document that contained an arbitration
clause, accepted arbitration. The Kaplans, however, who had not personally
signed that document, denied that their dispute with First Options was subject to
any arbitration agreement.88 The Kaplans filed written objections with the
arbitration panel to that effect. The arbitrators ruled in favor of First Options,
overruling the Kaplans’ objections to arbitration.89
The Court in First Options began its analysis by noting that there were three
separate types of disagreements between the parties present in the case.90 First,
the Kaplans and First Options “disagree about whether the Kaplans are personally
liable for MKI’s debt to First Options. That disagreement makes up the merits of
the dispute.”91 Second, the Kaplans and First Options disagree “about whether
they agreed to arbitrate the merits.”92 The Court characterizes this second
85
Rau, supra note 1, at 308 (“Now, ‘arbitrability’ is a word that might well be
banned from our vocabulary entirely . . . . Its use is particularly confusing” in First
Options).
86
First Options, 514 U.S. at 939-40.
87
Id. at 940.
88
Id. at 941.
89
Id.
90
Id. at 942.
91
Id.
92
Id.
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disagreement as one “about the arbitrability of the dispute.”93 Third, the Kaplans
and First Options “disagree about who should have the primary power to decide
the second matter.”94 In other words: which forum — a court or the arbitrator —
has the power to decide the issue of “arbitrability”?95 The Court’s decision
addresses only this third question.
The issue of forum is critical because, as the Court noted, “who — court or
arbitrator — has the primary authority to decide whether a party has agreed to
arbitrate can make a critical difference to a party resisting arbitration.”96 This is
because, as the Court explained, if a party has not agreed to arbitrate it “will
normally have a right to a court’s decision about the merits of its dispute.”97 On
the other hand, if a party has agreed to arbitration, then while that “party still can
ask a court to review the arbitrator’s decision…the court will set that decision
aside only in very unusual circumstances.”98 In other words, the choice of forum
has a major effect on the standard of review. As the Court later noted, “courts
grant arbitrators considerable leeway when reviewing most arbitration
decisions.”99
The Court in First Options began from the fundamental principle that because
“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.”100 Accordingly, the Court stated that if the parties agreed to
submit the matter of arbitrability to the arbitrators, then “the court should give
considerable leeway to the arbitrator, setting aside his or her decision only in
certain narrow circumstances.”101 On the other hand, if the answer to that
question is no, “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.”102 In sum, the Court concluded that “a court must defer to an
arbitrator’s arbitrability decision when the parties submitted that matter to
arbitration.”103
93
Id. Importantly, by phrasing this second question in such way, what is overlooked
is that the question contains within it two independent questions: First, did the Kaplans
enter into any arbitration agreement with First Options? Second, is the particular dispute
one that falls within the scope of that arbitration agreement? This example highlights the
importance of courts returning to and consistently using the traditional “two threshold
question” form of analysis.
94
Id.
95
Id.
96
Id. at 942.
97
Id.
98
Id.
99
Id. at 948.
100
Id. at 943.
101
Id.
102
Id.
103
Id.
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On the facts of the case, the Court held that “the Kaplans did not agree to
arbitrate arbitrability here.”104 This holding is clearly correct, as it appears
undisputed that the only agreement that the Kaplans signed in their personal
capacity with First Options did not contain an arbitration provision.105 The Court
also rejected First Options’s arguments that the Kaplans be found to have waived
any objection to arbitration because (i) they failed to file a court proceeding to
stay the arbitration; (ii) they submitted a written memorandum on the issue to the
arbitrators (in which they also objected to the arbitrators’ jurisdiction); or (iii) the
FAA “requires a presumption that the Kaplans agreed to be bound,” which the
Court rejected as “legally erroneous.”106
The reason that the First Options decision has become such a source of
confusion is that the Court did not approach the case by using the established “two
threshold question” framework in its analysis. In other words, the Court in its
decision did not ask: (1) is there a dispute about whether an arbitration agreement
exists between the parties and (2) if so, does this particular dispute fall within the
scope of the arbitration agreement.
Instead, the Court stated the issue before it as the determination of “who
should have the primary power to decide” about “the arbitrability of the
dispute.”107 This characterization of the issue is a mistake. This is because the
term “arbitrability” can apply to either an objection challenging the existence of
an arbitration agreement or an objection based on the scope of an arbitration
agreement. The same problem was repeated when the Court phrased the issue
before it as “how a court should decide whether the parties have agreed to submit
the arbitrability issue to arbitration.”108
As a result, the Court’s conclusion that “a court must defer to an arbitrator’s
arbitrability decision when the parties submitted that matter to arbitration” simply
repeats the ambiguity.109 This ambiguity permeates the entire decision in First
Options. In fact, a particularly dangerous misinterpretation of First Options arises
from the Court’s later discussion (which is not part of the holding of the case), in
which the Court states that it now wants to say “a word about how a court should
decide whether the parties have agreed to submit the arbitrability issue to
arbitration.”110
What is clear is that, from this point on, what the Court is addressing are the
rules governing disputes about the scope of an arbitration clause. A review of the
Court’s dicta following “a word about how a court should decide whether the
104
Id. at 944.
Id. at 941. See Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1507 (3d
Cir. 1994), aff’d, 514 U.S. 938 (1995) (“Individually, Mr. and Mrs. Kaplan signed only
the Letter Agreement. It did not have an arbitration clause.”).
106
514 U.S. at 946-47.
107
Id. at 942.
108
Id. at 944.
109
Id. at 943 (emphasis added).
110
Id. at 944.
105
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parties have agreed to submit the arbitrability issue to arbitration”111 reveals that
the Court is now using the term “arbitrability” to refer only to disputes about the
scope of the arbitration provision. At no time does the Court during this
discussion make any reference to, or say anything specifically about, how courts
should decide the separate issue of whether an arbitration clause exists. To the
contrary, as will be shown below, the Court’s entire discussion presumes that
there is an arbitration clause in existence between the parties.
The Court begins by instructing that “[w]hen 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.”112 In particular, a court should determine “whether the parties
objectively revealed an intent to submit the arbitrability issue to arbitration.”113
The Court then goes on to identify the two “arbitrability” issues to which its
remarks are directed: (1) which forum is to decide whether a particular dispute is
within the scope of an arbitration clause and (2) how such forum is to decide
whether a particular dispute falls within the scope of an arbitration clause. At no
time does the Court discuss how a dispute as to the very existence of an arbitration
agreement is to be handled.
The first issue, the Court states, “is rather arcane.”114 This is the question of
“who” — a court or the arbitrator — should decide if a particular dispute is within
the scope of the parties’ arbitration agreement. As the Court explains, “[a] party
often might not focus upon that question or upon the significance of having
arbitrators decide the scope of their own powers.”115
It is important to note that the discussion of this “rather arcane” question that
a “party often might not focus upon,” is viewed as occurring during the parties’
hypothetical negotiation of a binding arbitration agreement. The Court is saying
that it ought not to be presumed that the parties, while negotiating their arbitration
agreement, addressed the “rather arcane” question of “who” — the court or the
arbitrator — is to decide upon the scope of the arbitrator’s own power.
It is in this context that the Court states that “[c]ourts should not assume that
the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and
unmistakabl[e]’ evidence that they did so.”116 The Court explains that the reason
courts should require such strong evidence of intent is because the question of
“who” should decide is, as the Court had just noted, a “rather arcane” issue that a
party “often might not focus upon” while negotiating the agreement.117 If the
111
Id.
Id.
113
Id.
114
Id. at 945.
115
Id.
116
Id. at 944 (quoting AT&T, 475 U.S. at 649).
117
In First Options, the Court explained that the law presumes that silence as to the
“arcane” issue of “who” means that the parties most likely “would have thought a judge,
not an arbitrator” would decide the question of “who.” Id. at 945. For this reason, the
112
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parties had done so during the negotiations, then one would expect to be able to
find such “clear and unmistakable” evidence in the arbitration agreement itself.
That the issue of which forum — court or arbitrator — is being discussed in
the context of a dispute about the scope of the arbitration agreement is clear
because of the Court’s citation to and quotation from AT&T.118 It is often
overlooked that First Options did not create the “clear and unmistakable”
evidence test. Quite to the contrary, First Options is reciting a test that the Court
articulated in its AT&T decision.
In AT&T, there was no dispute about whether AT&T and the Union were
parties to a binding arbitration agreement.119 To the contrary, the sole issue was
whether the specific grievance by the Union challenging management’s decision
to lay off 79 installers because of a lack of work was a subject that was included
within the scope of the specific arbitration clause in the agreement — whose
existence, validity or enforceability was never at issue.120 The only issue before
the Court in AT&T was a dispute about the interpretation of the scope of the
arbitration clause. It was in this context that the Court in AT&T held: “Unless the
parties clearly and unmistakably provide otherwise, the question of whether the
parties agreed to arbitrate [a particular grievance] is to be decided by the court, not
the arbitrator.”121
The other “arbitrability” issue (in addition to the issue of which forum is to
decide) is “whether a particular merits-related dispute . . . is within the scope of a
valid arbitration agreement.”122 The Court explained that the question of whether
a particular dispute is within the scope of an arbitration clause “arises when the
parties have a contract that provides for arbitration of some issues. In such
circumstances, the parties likely gave at least some thought to the scope of
arbitration.”123
The rules governing how a court or arbitrator is to decide whether a particular
dispute is within the scope of an arbitration clause are different because now it can
be assumed that the parties did give thought to this issue. The “law treats silence
or ambiguity about” whether a particular merits-related dispute is arbitrable
differently.124 When the issue is one of scope (and not of “who”) the law reverses
the presumption. Whether a particular dispute is within the scope of an arbitration
clause is governed by the rule that “any doubts concerning the scope of arbitrable
issues should be resolved in favor of arbitration.”125
Court stated, arbitration law requires “clear and unmistakable” evidence of the parties’
intent to the contrary.
118
Id. at 944.
119
AT&T, 475 U.S. at 644-45.
120
Id. at 645.
121
Id. at 649.
122
First Options, 514 U.S. at 944-45.
123
Id. at 945.
124
Id.
125
Id. (quoting Moses H. Cone, 460 U.S. at 24-25).
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In sum, the Court’s entire discussion about “arbitrability” in First Options is
in the context of explaining why the law treats issues about (i) “whether a
particular merits related dispute is arbitrable because it is within the scope of a
valid arbitration agreement” differently from issues about (ii) “who” should be
making any such decision.126 The general discussion about “how a court should
decide whether the parties have agreed to submit the arbitrability issue to
arbitration” only discusses this issue in the context of questions about the scope of
an arbitration clause.127
Finally, the Court in First Options addressed the standard of review that
should be used by the courts. Where, as in First Options, there was no agreement
to submit the question of arbitrability to the arbitrators, and no waiver by the
Kaplans of this issue, then the “dispute was subject to independent review by the
courts.”128 This means that the district court should treat this issue the same way
as any other dispute that may come before it. Similarly, review by the Court of
Appeals “should proceed like review of any other district court decision,” which
means “accepting findings of fact that are not ‘clearly erroneous’ but deciding
questions of law de novo.”129
IV. AS A RESULT OF FIRST OPTIONS MANY COURTS HAVE
ADOPTED A FUNDAMENTALLY FLAWED ANALYSIS TO
DETERMINE WHO IS TO DECIDE CHALLENGES TO THE
MAKING OF AN ARBITRATION AGREEMENT
The First Options decision has been misinterpreted by a number of courts in a
manner that adds substantial confusion and uncertainty to the law of arbitration.
As previously discussed, the Supreme Court prior to First Options had articulated
a clear set of rules and principles governing how a court is to decide who — the
court or the arbitrator — is to decide certain threshold issues. At the core of these
rules is the principle that no person can be denied access to the courts and
compelled to submit a dispute to arbitration unless he or she has agreed to do so.
As a result of these core principles, the law was (and should remain) clear that
the court — and not the arbitrators — is in all cases to resolve any dispute as to
the making of a binding arbitration agreement. As previously discussed, such
disputes can take the form of a challenge to the existence of any arbitration
agreement — for example, where a party claims that it is not a signatory to the
agreement because the agent who signed the agreement did so without authority to
bind the principal, that the signature was a forgery, or that the person who signed
lacked the mental capacity to assent.130 Such disputes may also take the form of a
126
514 U.S. at 944-45.
Id. at 945.
128
Id. at 947.
129
Id. at 947-48.
130
See, e.g., Sphere Drake Insurance, Ltd. v. All American Insurance Co., 256 F.3d
587 (7th Cir. 2001) (a claim of lack of agency is for the court to determine because it
127
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challenge to the validity or enforceability of the arbitration agreement, such as a
claim that the arbitration clause was induced by fraud131 or that its specific terms
make it unenforceable under the state law of unconscionability.132 What is central
is that the rules remain clear that any disputes challenging the making of an
enforceable arbitration agreement can only be decided by the court. There are no
exceptions to this rule, as any such exception would raise the real risk of denying
a party its right to a court adjudication of its dispute without its consent.
We have also seen that a separate set of rules applies when the objection to
arbitration is that a particular dispute does not fall within the scope of the parties’
arbitration agreement. Disputes about the scope of an arbitration agreement are
presumptively to be decided by the court, but this general rule is subject to an
important exception. The question of whether a particular dispute falls within the
scope of the parties’ arbitration agreement may be delegated by the parties to the
arbitrators, provided that the court finds “clear and unmistakable” evidence of
such intent.
Unfortunately, a number of courts have misinterpreted First Options
statements regarding how “a court should decide whether the parties have agreed
to submit the arbitrability issue to arbitration.”133 The source of this confusion is
the use of the term “arbitrability.” Courts have interpreted the First Options
instructions about how a court should “decide whether the parties have agreed to
submit the arbitrability issue to arbitration” as applying equally to (i) challenges
that are made to the existence, validity or enforceability of the arbitration
agreement and (ii) challenges questioning whether a particular dispute is within
the scope of the parties’ arbitration agreement. Put simply, First Options has been
misinterpreted as instructing that a challenge to the existence, validity or
enforceability of the arbitration agreement can be referred to the arbitrators when
concerns the existence of an arbitration agreement); Chastain v. Robinson-Humphrey Co.,
957 F.2d 851, 853 (11th Cir. 1992) (forgery); Spahr v. Secco, 330 F.3d 1266 (10th Cir.
2003) (lack of mental capacity). See generally Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 444 n.1 (2006).
131
See, e.g., Prima Paint, 388 U.S. at 403-04 (“[I]f the claim is fraud in the
inducement of the arbitration clause itself — an issue which goes to the ‘making’ of the
agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory
language does not permit the federal court to consider claims of fraud in the inducement
of the contract generally.”).
132
Numerous courts have considered whether an arbitration provision is
unenforceable because it is procedurally or substantively unconscionable. See, e.g., Iberia
Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004); Ticknor v.
Choice Hotels Int’l, Inc., 265 F.3d 931, 940 (9th Cir. 2001). While these cases do not
agree on the merits, they all are ones in which the issue is decided by the court, not the
arbitrator. Barker v. Golf U.S.A., Inc., 154 F.3d 788, 792 (8th Cir. 1998); Nagrampa v.
MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006); Dobbins v. Hawk’s Enters., 198 F.3d 715,
717 (8th Cir. 1999). This issue is currently before the Supreme Court. See Rent-A-Car v.
Jackson, cert. granted, 130 S.Ct. 1133 (Jan. 15, 2010).
133
First Options, 514 U.S. at 944.
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there is “clear and unmistakable” evidence that such was the parties’ intent. This
is a serious error.
As a result of a misinterpretation of First Options, many courts are now using
a distorted and confusing method to decide objections to arbitration. These courts
now fail to begin their analysis by asking the two traditional threshold questions:
(i) did the parties enter into a binding arbitration agreement? and (ii) if so, did the
parties agree that this particular dispute is within the scope of the matters they
agreed to arbitrate? As a result, these courts also fail to use the formerly wellestablished set of rules to guide their determination as to “who” has the
jurisdiction to decide each of these two separate questions.
Instead, as a result of First Options, many courts now ask a single question:
What have the parties agreed as to who has the primary authority to decide any
questions of “arbitrability?” As a result of an understandable misinterpretation of
First Options, the courts then immediately seek to find “clear and unmistakable
evidence” that the parties intended to submit “the arbitrability issue” to the
arbitrator. This result not only adds substantial confusion to the law of arbitration,
but also runs the risk of seriously unfair and unjust results.
Where the question is whether there exists any binding arbitration agreement,
there is no justification for asking whether this issue is one the parties agreed is to
be submitted to arbitration. In fact, to attempt to do so is to ask for something that
is logically impossible as it presumes its own premise. It is only with respect to
the second, separate question of whether a particular dispute is within the scope of
the arbitration agreement, that one can ask whether the parties intended such issue
to be adjudicated by the courts or the arbitrator.
A. Court Decisions That Apply the Wrong Analysis as a Result of First Options
The Second Circuit’s interpretation of First Options is both common and
troubling: “We read First Options as a clarification of the type of evidence
needed to submit to arbitration a dispute regarding whether parties ever entered
into a valid arbitration agreement at all.”134 With these words, the Second
Circuit departed from the long-established rules of arbitral jurisprudence that have
consistently held that such issue is one that must be decided by the court without
exception.
The Second Circuit in Abram Landau set out its interpretation of First
Options as follows. The Second Circuit correctly noted that in First Options the
appellants had “argued that no valid arbitration agreement existed.”135 The
Second Circuit went on to explain that the Supreme Court had stated that whether
the appellants were bound by the arbitration agreement raises a “question of
arbitrability,” and that such issue is to be decided by the courts, unless there is
“clear and unmistakable evidence of an agreement between the parties to submit
134
Abram Landau Real Estate v. Bevona, 123 F.3d 69, 73 (2d Cir. 1997) (emphasis
added).
135
Id. at 73.
182
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the question to arbitration.”136 In so interpreting First Options, the Second Circuit
held that the question of “whether parties ever entered into a valid arbitration
agreement” was no longer an issue that must be determined by a court. Instead, it
held that the question of the very existence of an arbitration agreement could upon
a showing of “clear and unmistakable evidence” be submitted to the arbitrator.137
Similarly, in Riley Manufacturing Co. v. Anchor Glass Container Corp.,138
the Tenth Circuit addressed the “issue of who decides arbitrability in the first
place — the courts or an arbitrator,” where “the dispute is whether there is a valid
and enforceable arbitration agreement in the first place.” The Tenth Circuit held,
relying on First Options, that “whether the parties have agreed to allow an
arbitrator to decide the existence of their putative agreement to arbitrate” turns on
“whether the parties’ agreement contains ‘clear and unmistakable’ evidence they
intended the arbitrator to decide the issue.”139 The Tenth Circuit, in looking for
such intent, looked to the disputed agreement itself — the very agreement whose
existence was denied — to see if there was “‘clear and unmistakable evidence’
within the four corners of the Manufacturing Agreement that the parties intended
to submit the question of whether an agreement to arbitrate exists to an
arbitrator.”140
As shown below, this view of First Options has been adopted by many other
courts as well.141 Moreover, this problem becomes even more acute when one
examines the sources that the courts look to in order to find the “type of evidence”
needed “to submit to arbitration a dispute regarding whether parties ever entered
into a valid arbitration agreement at all.”142
136
Id.
Id.
138
157 F.3d 775, 779 (10th Cir. 1998).
139
Id. at 780.
140
Id.
141
See, e.g., Gourley v. Yellow Transp., LLC, 178 F. Supp. 2d 1196, 1202 (D. Colo.
2001) (“A court has jurisdiction to determine initially the existence of a valid arbitration
agreement unless there is ‘clear and unmistakable evidence’ within the four corners of the
[very] agreement [whose existence is being disputed] that the parties intended to submit to
an arbitrator the question of whether an agreement to arbitrate exists”). In Qualcomm Inc.
v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006), the court stated as follows: “First, we
must determine who has the primary power to decide arbitrability in this case. Generally,
the ‘question of arbitrability . . . is undeniably an issue for judicial determination.’ AT&T,
475 U.S. at 649. However, in First Options of Chicago, Inc. v. Kaplan, the United States
Supreme Court held that ‘the question “who has the primary power to decide arbitrability”
turns upon what the parties agreed about that matter.’ 514 U.S. 938, 943 . . . (1995).”
Fortunately, a close reading of the case shows that the actual issue in dispute concerned
the scope of the arbitration clause, not its existence or validity. However, use of the term
“arbitrability” obscures this, which allows the statement to be read as a general rule
applicable to questions about the existence, validity or enforceability of the arbitration
agreement, as well as disputes about the scope of an arbitration agreement.
142
Abram Landau, 123 F.3d at 73.
137
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B. Courts Mistakenly Look for Evidence of Intent in the Very Agreement Whose
Existence Is Being Disputed
A common error found is that many courts look to the “four corners” of the
very agreement the existence of which is the matter in dispute, to find the required
“clear and unmistakable evidence of [the parties’] intent.”143 For example, courts
have relied upon a broadly drafted arbitration clause alone as evidence of the
parties’ intent to arbitrate issues of arbitrability.144 Many courts “have also found
clear and unmistakable evidence when the parties agree to be bound by the rules
of an arbitrable tribunal that requires arbitrability to be decided in arbitration.”145
In Apollo Computer, Inc. v. Berg,146 for example, Apollo Computer, Inc.
(“Apollo”) argued that no “agreement to arbitrate exists between it and the
defendants.” The First Circuit noted that “[o]rdinarily, Apollo would be entitled
to have these issues resolved by a court.”147 In this case, however, the First
Circuit noted that the parties in their contract had agreed that all disputes would be
settled by binding arbitration “in accordance with the rules of arbitration of the
International Chamber of Commerce.”148 The ICC Rules provide that the
arbitrators have jurisdiction to decide any dispute concerning the existence or
validity of the agreement. Relying on the incorporation by reference of the ICC
rules, the First Circuit held that the “contract therefore delegates to the arbitrator
decisions about the arbitrability of disputes involving the existence and validity”
of the agreement to arbitrate, and that therefore the “arbitrator should decide
whether a valid arbitration agreement exists between Apollo and the
defendants.”149
Similarly, in Contec Corp. v. Remote Solution Co., Ltd.,150 the court stated,
“We have held that ‘the issue of arbitrability may only be referred to the arbitrator
if there is clear and unmistakable evidence from the arbitration agreement, as
construed by the relevant state law, that the parties intended that the question of
arbitrability shall be decided by the arbitrator.’” (citation omitted)(emphasis in
original). In this case, Remote Solutions Co., Ltd. (“Remote Solutions”)
contended that it could not be compelled to arbitrate with Contec Corporation
because Contec Corporation was not a signatory to the arbitration agreement.151
143
See, e.g., Riley Mfg. Co., 157 F.3d at 780; Gourley, 178 F. Supp. 2d at 1202.
See Shaw Group Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 121 (2d Cir. 2003).
145
Oriental Republic of Uruguay v. Chem. Overseas Holding, Inc., 2006 WL
164967, at *5 (S.D.N.Y. Jan. 24, 2006); Accord: James & Jackson, LLC v. Willie Gary,
LLC, 906 A.2d 76, 80 (Del. 2006) (“As a matter of policy, we adopt the majority federal
view that reference to the AAA rules evidences a clear and unmistakable intent to submit
arbitrability issues to an arbitrator”).
146
886 F.2d 469, 473 (1st Cir. 1989).
147
Id.
148
Id. at 469.
149
Id. at 473.
150
398 F.3d 205, 208 (2d Cir. 2005).
151
Id. at 207.
144
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The Second Circuit noted that the arbitration agreement incorporated the
Commercial Arbitration Rules of the American Arbitration Association which
provide that the “arbitrator shall have the power to rule on his or her own
jurisdiction, including any objections with respect to the existence, scope or
validity of the arbitration agreement.”152 The court then relied on these rules in
finding that the “incorporation of arbitration rules giving jurisdiction to the
arbitrator provides clear and unmistakable evidence of the parties’ intent to
arbitrate issues of arbitrability.”153 The Second Circuit concluded, therefore, that
“it [was] the province of the arbitrator to ‘decide whether a valid arbitration
agreement exists.’”154
The gravity of the legal error of these decisions has been recognized by some
courts and commentators. The simple fact is that it is impossible to search for the
party’s intent in the wording of the arbitration agreement when there is a
challenge to the very existence of any binding arbitration agreement at all. The
Third Circuit in China Minmetals Materials Import & Export Co. v. Chi Mei
Corp.,155 for example, pointed out the fallacy of relying upon an incorporation by
reference of arbitration rules that give power to the arbitrator to resolve any
dispute as to the existence of a valid arbitration agreement. In this case, China
Minmetals Material Import and Expert Co., Ltd. (“Minmetals”) had commenced
an arbitration against Chi Mei Corp. (“Chi Mei”) before CIETAC pursuant to the
arbitration clauses contained in two contracts.156 Chi Mei objected to CIETAC’s
jurisdiction, but nevertheless appeared before it in order to submit evidence “that
the contracts which contained the arbitration clause on which Minmetals relied
were forged.”157 More specifically, Chi Mei alleged “that the two contracts were
entirely fraudulent, containing a forged signature of a nonexistent Chi Mei
employee as well as a forged corporate stamp.”158 The arbitral tribunal rejected
Chi Mei’s arguments that the documents were forged and issued an award in favor
of Minmetals in excess of $4 million.
The Third Circuit rejected the argument that, under First Options, Chi Mei
should have been found to have consented to having the issue of forgery of these
two contracts decided by the arbitrators. The Third Circuit acknowledged that
international arbitration rules often give arbitrators the power to decide their own
jurisdiction.159 More specifically, it found that the “contracts in this case, for
example, incorporate the rules of CIETAC” and “[t]hose rules do indeed allow the
arbitrators the power to determine their own jurisdiction.”160 The CIETAC Rules
152
153
154
155
156
157
158
159
160
Id. at 208.
Id. at 210.
Id. at 211 (citation omitted).
334 F.3d 274, 287 (3d Cir. 2003).
Id. at 278.
Id.
Id. at 277.
Id. at 287.
Id. at 288.
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185
provided that “[t]he Arbitration Commission has the power to decide on the
existence and validity of an arbitration agreement and on jurisdiction over an
arbitration case.”161 This is precisely the type of arbitration rules that a majority
of federal courts view as evidencing a clear and unmistakable intent to submit
arbitrability issues to an arbitrator.
But the Third Circuit recognized that such an analysis and search for evidence
of a party’s intent makes no sense when the challenge is to the very existence and
validity of the arbitration agreement itself, as was the case in China Minmetals.
Where the making of the arbitration agreement is at issue, neither the “four
corners” of the disputed contracts, nor the wording of the arbitration clause, nor
the incorporation of the CIETAC Rules can serve as any evidence of Chi Mei’s
intent at all. As the Third Circuit explained:
Nonetheless, incorporation of this rule into the contract is relevant only if the
parties actually agreed to its incorporation. After all, a contract cannot give an
arbitral body any power, much less the power to determine its own jurisdiction, if
the parties never entered into it.162
In short, where the validity of the arbitration contract itself is challenged, it
cannot serve as the source of power to the arbitrator.163
Similarly, in Sphere Drake Insurance Ltd. v. All American Insurance Co.,164 a
party disputed an agent’s authority to have bound it to a contract. The Seventh
Circuit held that the judiciary, and not the arbitrator, was to decide whether a
contract came into being. The court noted that some courts have indicated
otherwise, in light of First Options. However, the Seventh Circuit rejected any
such exception. It explained:
a person who has not consented (or authorized an agent to do so on his behalf)
can’t be packed off to a private forum. Courts have jurisdiction to determine
their jurisdiction not only out of necessity . . . but also because their authority
depends on statutes rather than the parties’ permission. Arbitrators lack a
comparable authority to determine their own authority because there is a noncircular alternative (the judiciary) and because the parties do control the
existence and limits of an arbitrators power. No contract, no power.165
As the court continued: “Section 2 of the Federal Arbitration Act, 9 U.S.C. § 2,
says that an arbitration agreement ‘shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the revocation of any
contract.’ An agent’s lack of authority is a ground that prevents the enforcement
161
Id. at 288.
Id.
163
Rau, supra note 1, at 305 (“It follows also that attempts to find a source of arbitral
power in the rules of arbitral institutions alone must be circular”).
164
256 F.3d 587, 591 (7th Cir. 2001).
165
Id.
162
186
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‘of any contract’; does it not follow that judges must determine whether the agent
had authority?”166
“[B]ecause an ‘arbitrator’s jurisdiction is rooted in the agreement of the
parties,’ a party who contests the making of a contract containing an arbitration
provision cannot be compelled to arbitrate the threshold issue of the existence of
an agreement to arbitrate. Only a court can make that decision.”167 As the
Seventh Circuit stated in Matterhorn, Inc. v. NCR, Corp.,168 “There would
however be a severe problem of bootstrapping if a party to a contract could be
forced to arbitrate the question whether he had been coerced or deceived into
agreeing to arbitrate disputes arising under the contract.”
That a court should not and cannot look to the “four corners” of the very
agreement being challenged to find “clear and unmistakable” evidence of a party’s
intent is vividly illustrated by Spahr v. Secco.169 In this case, a lawsuit was filed
on behalf of Mr. Spahr against U.S. Bancorp Investment Inc. (“U.S. Bancorp”)
alleging breach of fiduciary duty, fraud and negligence. U.S. Bancorp filed a
motion to compel arbitration on the basis of the parties’ agreement, which
agreement provided for arbitration of all disputes relating to that contract.
The Tenth Circuit began its analysis by stating that “[w]e first consider
whether the agreement signed by Mr. Spahr in 1995 contains ‘clear and
unmistakable evidence’ that the parties agreed to submit the question of
arbitrability to arbitration.”170 Fortunately for Mr. Spahr, the Tenth Circuit was
among the courts that had previously held that “broad provisions to arbitrate all
disputes arising out of or relating to the overall contract, like the one at issue here,
do not provide the requisite clear and unmistakable evidence ‘within the four
corners of the . . . [a]greement that the parties intended to submit the question of
whether an agreement to arbitrate exists to an arbitrator.’”171
The reason we say fortunately for Mr. Spahr is because other courts, as noted
above, have held that such broad arbitration clauses alone can be used as evidence
of a party’s intent to submit the question of whether an arbitration agreement
exists to the arbitrator. It also is fortunate that the agreement with U.S. Bancorp
did not incorporate arbitration rules giving jurisdiction to the arbitrator. As also
166
Id. at 590. Accord: Sandvik AB v. Advent International Corp., 220 F.3d 99, 101
(3d Cir. 2000), where Advent contended that the agent who signed the agreement on its
behalf lacked authority to do so. The Third Circuit held that this was an issue for the
court, because “[e]ven under the severability doctrine, there may be no arbitration if the
agreement to arbitrate is nonexistent.”
167
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1140-41
(9th Cir. 1991). See Park, supra note 57, at 130 (“In the absence of an arbitration
agreement accepted by the person alleged to be bound with respect to the dispute in
question, the person rendering the award would seem better characterized as a vigilante,
intermeddler or imposter”).
168
763 F.2d 866, 869 (7th Cir. 1985).
169
330 F.3d 1266, 1270 (10th Cir. 2003).
170
Id. (citing First Options).
171
Id. (citing Riley Mfg. Co., 157 F.3d at 780).
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noted above, many courts have found incorporation of such rules to serve as clear
and unmistakable evidence of the parties’ intent to arbitrate issues of
arbitrability.172
The specific facts of the defense being asserted by Mr. Spahr bring into vivid
relief that when the validity of the arbitration agreement itself is being challenged
there is never any justification for looking to the arbitration agreement itself for
“clear and unmistakable evidence.”
According to the complaint, Mr. Spahr “is an adult and unable to manage his
property and financial affairs effectively because he suffers from dementia and
Alzheimer’s disease.”173 Mr. Spahr had opened an investment account at U.S.
Bancorp in June 1996, and, according to the complaint, during “the following
year, Secco exploited Spahr’s mental deficiencies” in order to cheat him out of
large sums of money and real estate.174 Nevertheless, U.S. Bancorp asserted that
based on the arbitration clause in the contract it was clear that the parties intended
that the arbitrators would decide any questions as to the validity of the contract.
In other words, despite the argument being put forth on Mr. Spahr’s behalf that he
lacked “sufficient mental capacity to understand the nature and effect of this
contract,” U.S. Bancorp argued that the contract should be relied upon as evidence
that he intended such issue to be submitted to the arbitrators.175
What is especially troubling about Spahr v. Secco is that even in the face of a
claim that Mr. Spahr lacked the mental capacity to assent to be bound, the Court
of Appeals did not resolve the matter by invoking the traditional rule that
questions challenging the existence or validity of an arbitration agreement are for
the court as a matter of law. Instead, the court used the approach which it
believed was required by First Options, of “whether the agreement signed by
Spahr in 1995 contains ‘clear and unmistakable evidence’ that the parties agreed
to submit the question of arbitrability to arbitration.”176 This is legal error, and it
is a direct result of misinterpreting First Options. When the challenge is to the
making of an arbitration agreement, there is no factual predicate from which to
ask such questions. And doing so can lead to unfair and unjust results.
Mr. John Brown was not as fortunate as Mr. Spahr. In Primerica Life
Insurance Co. v. Brown,177 Mr. Brown, through his legal representative, asserted
claims against CitiFinancial for breach of contract and related claims. Mr. Brown,
as found by the district court, has “been profoundly retarded since birth.”178 The
manner in which he was required “to sign the loan agreement containing the
arbitration clause,” was by the loan agent “printing his name on a piece of paper
172
See, e.g., Contec Corp., 398 F.3d at 210; Apollo Computer, 886 F.2d at 470;
Oriental Republic, 2006 WL 164967 at *5.
173
330 F.3d at 1268.
174
Id.
175
Id.
176
Id. at 1270.
177
304 F.3d 469 (5th Cir. 2002).
178
Id. at 472.
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and having him copy it on the appropriate line.”179 CitiFinancial filed a petition to
compel arbitration. The Fifth Circuit held that because of the arbitration clause,
Mr. Brown’s capacity defense was an issue to be submitted to the arbitrator.
It was clear, until the courts began misinterpreting First Options, that a court
should approach such a case by asking the two separate traditional threshold
questions. First, is there any claim challenging the making of the arbitration
agreement? Challenges of this kind include arguments, such as: (i) the person
was not a signatory to the arbitration agreement; (ii) the agreement was signed by
an agent who did not have the authority to bind the principal; (iii) the signature on
the agreement was a forgery; (iv) no contract came into being because the person
lacked the mental capacity to assent; (v) there was fraud in the inducement of the
arbitration clause itself; or (vi) the specific circumstances and features of the
arbitration provision render enforcement unconscionable.
The traditional rule was clear that claims challenging the making of the
arbitration agreement must always be decided by the court.180 As the Court in
Wiley explained, this must be the case because the “duty to arbitrate being of
contractual origin, a compulsory submission to arbitration cannot precede judicial
determination” that the arbitration agreement exists and is valid.181 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.”182 If there is no binding arbitration agreement, then no
power has been given to the arbitrators.
This was the law prior to distortions caused by the misinterpretations of First
Options — and is the law to which courts and practitioners should return.
V. CONCLUSION
There exists a well-defined traditional set of rules for courts and practitioners
to use in determining whether the court or the arbitrator is to decide if a person is
bound to arbitrate a particular dispute. These rules can be directly derived from
179
Id.
See Wiley, 376 U.S. at 546 (“Past cases leave no doubt” that the threshold issue of
whether a nonsignatory is bound by an arbitration clause is for the court, not the
arbitrators).
181
Id. at 547. This result is also supported by §2 of the FAA, which provides that
“[a] written provision in any maritime transaction or a contract evidencing a transaction
involving commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction . . . 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. As
the Court explained in Southland v. Keating, “We discern only two limitations on the
enforceability of arbitration provisions governed by the Federal Arbitration Act: they
must be part of a written maritime contract or a contract ‘evidencing a transaction
involving commerce’ and such clauses may be revoked upon ‘grounds as exist at law or in
equity for the revocation of any contract.’” 465 U.S. at 10-11.
182
Wiley, 376 U.S. at 547.
180
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three seminal Supreme Court cases that set forth the fundamental legal framework
of U.S. arbitration law: John Wiley & Sons, Inc. v. Livingston;183 Prima Paint
Corp. v. Flood & Conklin Manufacturing Co.;184 and AT&T Technologies, Inc. v.
Communications Workers of America.185
Currently, however, many courts are no longer applying the traditional
analytical approach required by these rules. Instead, there exists significant
confusion as to how a court is to determine the allocation of authority between
courts and arbitrators. The source of this confusion is directly traceable to the
manner in which many courts have interpreted First Options. The result is that
courts have drifted away from applying the traditional paradigm for approaching
an arbitration case.
In order for a court to determine which forum — the court or the arbitrator —
is to decide whether a party is required to arbitrate a dispute, the court is required
to make a distinction between two fundamentally different types of objections to
the arbitration. One type is a challenge to the making (i.e., existence, validity or
enforceability) of the arbitration agreement itself. The other type of objection
challenges whether the specific dispute is one that falls within the scope of the
arbitration agreement. As case law made clear prior to First Options, and as has
been recognized over the years by numerous courts of appeals, these are the two
fundamental threshold questions that a court must identify and distinguish
between in every arbitration case. It is crucially important to identify which of
these two types of objection is being asserted because each is subject to a different
set of rules that determine who — the court or the arbitrator — has primary
jurisdiction to rule on the merits of such issues.
A challenge to the existence, validity or enforceability of an arbitration clause
is an issue that must be decided by the court — without exception. This is
because the “duty to arbitrate being of contractual origin, a compulsory
submission to arbitration cannot precede judicial determination that the
[arbitration] agreement does in fact create such a duty.”186 The rule is also
required by §4 of the FAA.
In contrast, a claim that a particular dispute does not fall within the scope of
the party’s arbitration agreement is subject to different rules. As to this type of
objection, the rule is that “[u]nless the parties clearly and unmistakably provide
otherwise, the question of whether the parties agreed to arbitrate [a particular
grievance] is to be decided by the court, not the arbitrator.”187 In other words, this
is a type of issue that the parties in their arbitration agreement can decide to assign
to the arbitrators. Recognition of the difference between these two threshold
challenges to arbitration is also important because it controls the standard of
183
184
185
186
187
376 U.S. 543 (1964).
388 U.S. 395 (1967).
475 U.S. 643 (1986).
Wiley, 376 U.S. at 547.
AT&T, 475 U.S. at 649.
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review to be applied by the courts after the conclusion of an arbitration if
challenges are made to the enforcement of the arbitral award.
As a result of a misinterpretation of First Options, many courts now shape
their analysis by asking as the threshold question: “What have the parties decided
as to ‘who’ is to decide the question of arbitrability?” This is a mistake. The use
of the phrase “the question of arbitrability” has introduced confusion into
arbitration jurisprudence, because the term “arbitrability” is inherently ambiguous.
The phrase “question of arbitrability” has been used to refer to a challenge to the
existence, validity or enforceability of an arbitration agreement. However, such
phrase has also been used to refer to a dispute about whether a particular issue is
within the scope of the arbitration agreement. As a result, the use of the term “the
question of arbitrability” hides from view the necessity of distinguishing between
these two separate and fundamentally different questions. This leads to the clear
rules of decision that were developed as to the first issue being improperly applied
to the adjudication of the other. This result not only adds substantial confusion to
the law of arbitration, but also runs the risk of seriously unfair and unjust results.
Courts and practitioners alike should return to the law as it existed prior to the
distortions caused by misinterpretations of First Options.