Carve-Outs and Injunctive Relief in Arbitration Cases.

AuthorLathrop, Mitchell L.

THE dual issues of arbitrability and who decides the validity of an arbitration provision continue to be disparate and unsettled, (1) particularly where parties modify otherwise commonplace arbitration agreements by adding carveouts. Even where an arbitration agreement provides otherwise clear and unmistakable evidence of the parties intent to delegate decisions of arbitrability to the arbitrator, a carveout provision may upend the enforceability of the arbitration provision.

The decisions of the United States Supreme Court following the enactment of the Federal Arbitration Act ("FAA") (2) in 1947 make clear that federal courts must respect and enforce arbitration provisions in accord with the explicit provisions of the FAA 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." (3) Over the years, the high court has dealt with multiple issues touching on the FAA and arbitration provisions in contracts subject to the FAA such as collective bargaining agreements, (4) labor laws, (5) claims of fraud, (6) debt collection, (7) arbitrator disclosure and misconduct, (8) judicial authority and discretion, (9) and FAA preemption of state laws. (10) The Court also decided issues relating to the arbitrability of securities law claims, (11) even when coupled with state law pendent claims, (12) antitrust claims, (13) and even discrimination claims. (14) As the Court pointed out:

In many cases over many years, this Court has heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes. In fact, this Court has rejected every such effort to date (save one temporary exception since overruled), with statutes ranging from the Sherman and Clayton Acts to the Age Discrimination in Employment Act, the Credit Repair Organizations Act, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act. (15) Courts and arbitrators must address two threshold questions before compelling arbitration: (1) is there a valid agreement to arbitrate, and (2) is the dispute covered by the arbitration provision?(16) Once those two questions have been answered in the affirmative, the next issue which is likely to arise in many cases is: who decides arbitrability, the arbitrator or the court? The general rule is that when an arbitration provision or the rules of an arbitration provider provide that the arbitrator will determine arbitrability, that decision is left to the arbitrator except in cases where a party challenges the validity of the arbitration provision itself. When a party challenges the validity of the arbitration provision, the court must decide arbitrability. In First Options of Chicago, Inc. v. Kaplan, (17) the Supreme Court held that if the parties agree to submit the question of who has the primary power to decide arbitrability to the arbitrator, the court should defer to the arbitrator's arbitrability decision, but if not, the court should decide the question independently. First Options involved several related disputes between First Options of Chicago, a firm that cleared stock trades on the Philadelphia Stock Exchange, and three adverse parties: Manuel Kaplan; his wife, Carol Kaplan; and his wholly owned investment company, MK Investments, Inc. (MKI). First Options was the clearing house for MKI trades. The parties entered into a 1988 workout agreement which was memorialized in four separate documents which governed resolution of debts to First Options that MKI and the Kaplans incurred as a result of the October 1987 stock market crash. In 1989, MKI lost an additional $1.5 million, whereupon First Options took control of, and liquidated, certain MKI assets; demanded immediate payment of the entire MKI debt; and insisted that the Kaplans were personally obligated to pay any deficiency. First Options demanded arbitration by a panel of the Philadelphia Stock Exchange.

MKI signed the only workout document of the four that contained an arbitration clause. The Kaplans, however, had not signed that document. They denied that their disagreement with First Options was arbitrable and filed written objections with the arbitration tribunal. The arbitrators nevertheless decided that they had the power to rule on the merits of the parties' dispute and ruled in favor of First Options. The Kaplans petitioned for vacatur of the arbitration award, while First Options petitioned to confirm. The court confirmed the award and the Kaplans appealed. The Third Circuit agreed with the Kaplans and reversed confirmation of the award. (18)

The Supreme Court issued certiorari to review two specific issues: (1) the standard of review applied to a court's decision to confirm or vacate an arbitrator's award, and (2) who, the court or the arbitrator, has the primary authority to decide whether a party has agreed to arbitrate. As to the second issue, the high court made clear that "the question 'who has the primary power to decide arbitrability' turns upon what the parties agreed about that matter." (19) In other words, if the parties expressly gave the arbitrability decision to the arbitrator, then the arbitrator would decide. Otherwise it would be up to the court. (20)

The standard of review of an arbitrator's decision as articulated in First Options is that normally applied to all appellate review of lower court decisions. "[C]ourts grant arbitrators considerable leeway when reviewing most arbitration decisions; but that fact does not mean that appellate courts should give extra leeway to district courts that uphold arbitrators."(21) At the same time, however, Sections 10 and 11 of the FAA set forth the exclusive categories for vacating or modifying an arbitral award.

Many current arbitration provisions provide for administration of an arbitration by an arbitral provider such as the American Arbitration...

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