Chapter 8

• Jurisdiction: United States

Chapter 8

Arbitrability

§ 8.01 The Problem of Arbitrability

“Arbitrability” as discussed in this chapter refers to private sector arbitration and is concerned with the issue of who makes the decision as to which matters are subject to arbitration. The discussion does not relate to court annexed alternate dispute resolution, nor is it relevant to such forms of private sector alternate dispute resolution as mediation, in which the parties participate at all times by consent.

For purposes of this examination, pre-dispute arbitration agreements between employers and employees are treated as “voluntary” even when employees are required to sign these agreements in order to obtain employment as is the case, for example, in the securities industry, or to sign them as a condition of continued employment.¹

In the face of a party’s objection that the party has not agreed to arbitration, “gateway” arbitrability questions may arise: 1) whether or not there is an extant, consensual and binding agreement to arbitrate the dispute and 2) who determines whether a binding agreement to arbitrate actually exists, the arbitrator asserted to have jurisdiction or a court? Arbitration agreements may be found embodied as one provision, among many others, within general substantive contracts. Alternatively, their drafters may choose to place arbitration agreements in separately signed documents relating solely to arbitration. These separate agreements may either contain numerous arbitration related clauses beyond the provision relating to the agreement to arbitrate itself or these agreements may consist of just a single specific provision stating the agreement to arbitrate. The law traced in this section demonstrates that the choice of these forms may have a major impact on the gateway arbitrability questions being examined.

“Gateway” questions may also arise because the party objecting to arbitration claims that either the agreement or provision to arbitrate and/or the contract in its entirety suffers from a defect, such as being substantively and/or procedurally unconscionable, grounds not to enforce contracts in general. The party objecting is generally seeking to avoid arbitration in favor of a judicial forum.

The policy reasons for entering into agreements to arbitrate in the employment context vary depending upon whether the employees covered by the agreement are union represented and the arbitration provision is negotiated or the arbitration agreement is imposed by the employer as a condition of employment or continued employment when there is a direct relationship between employer and employee and no union involved. In the former case, it will likely be the union that seeks an arbitration system as the quid pro quo for giving a no-strike pledge and it will usually be the union and/or the employee who seeks to go to arbitration. When this is the case, employers, particularly those that have not fared well with the current pool of labor arbitrators, are more likely to be the party claiming that a matter is not arbitrable, leaving the union and the employee to resort to slower and more expensive litigation.² In the latter case, without union representation,³it is more likely that the employer, having decided to impose arbitration, will wish to enforce the arbitration clause, while the employee and the employee’s counsel may prefer to go to a jury, seeking large damages.

For reasons that will be discussed in this section, parties drafting or negotiating mandatory pre-dispute arbitration clauses should generally avoid ambiguity about their wishes regarding who determines arbitrability, a court or an arbitrator. Silence or ambiguity on this matter may leave the parties with a result they do not anticipate and did not intend.

In this discussion, it is assumed that the arbitration agreements in question are adopted pursuant to the FAA or have selected by choice of law the FAA⁴ as controlling. Parties writing arbitration agreements adopting, or choosing, state law as the sole operative statute to the exclusion of the FAA in those states in which general arbitration law parallels the UAA,⁵ may anticipate that the outcome of state gateway litigation will parallel the outcome under the FAA. When agreements are reached and controlled by state law to the exclusion of the FAA in those states in which general arbitration statutes are not parallel to the UAA, counsel should carefully review how gateway issues will be treated under the controlling law.

Any analysis of the gateway questions must start with two key FAA provisions:

“9 U.S.C. § 2. Validity, irrevocability, and enforcement of agreements to arbitrate.”

“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, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such contract, transaction, or refusal, 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. § 3. Stay of proceedings where issue thereof referable to arbitration.”

“If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration, the court in which such suit is pending, upon being satisfied that the issue in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”

Section 2 ends prior bias against arbitration. Arbitration agreements can be set aside only if the arbitration contract could be set aside under the same rules that apply to contracts in general in that particular state.

Outside the United States and throughout the western world the law provides that an arbitrator or arbitration tribunal has the power to evaluate its own jurisdiction and to determine whether it has jurisdiction over a matter. This concept has been termed “competence of competence” in England, “kompetenz-kompetenz” in Germany, and “competence de la competence” in France. However, the term has largely been ignored in the U.S. courts and appears here largely in scholarly literature.⁶ Arbitrability in the United States is, in essence, the same as “competence of competence” and relates to whether the power to decide arbitrability is assigned to the courts or to arbitrators.

Arbitrability may be established either by legislative or judicial fiat or by the consent of the parties, as embodied in their arbitration agreement. These approaches are not absolute. The consent approach is essentially grounded in contract theory and allows the parties generally to determine their own rules. There is tension between mandated rules and contractual rules. In the United States this tension has been balanced to a greater degree in favor of freedom of the parties to contract than elsewhere in the world.

If the parties to a private arbitration agreement have agreed post-dispute to submit a matter to arbitration they are unlikely to challenge the jurisdiction of the arbitrator or arbitrators they have just empowered. It is considerably more probable that a challenge regarding the scope or duration of an agreement to arbitrate will be assayed when arbitration is sought under a pre-dispute arbitration agreement, particularly when the “agreement” was made because the employer insisted on it as a condition of employment, or continued employment.⁷

Why would a party to a pre-dispute arbitration agreement be particularly concerned over the question of who decides arbitrability? Employers cause their employees to enter into alternate dispute resolution agreements out of concern for cost control, legal mandates, and to manage disputes.⁸ Employer concern about employment litigation may include a fear that generally jurors will be biased against employers. When arbitrability, as opposed to questions on the merits of the matter, is at issue, the controversy is more likely to involve legal issues to be determined by the judge.

In employment disputes it will generally be the employee who is seeking a day in court who will be the party filing suit challenging arbitrability. No matter how the parties write their arbitration agreement, the assignment of the arbitrability decision to either a court or the arbitrator may ultimately cause problems for the party drafting the arbitration clause. In employment cases, the clauses are usually drafted unilaterally by employers. When the parties establish no rule regarding arbitrability decisions, the default rules created by the courts will control.

Who may invoke arbitrability? Clearly, the parties to an agreement to arbitrate may seek to enforce the agreement. But, may a supervisor personally impacted by an employment related dispute subject to arbitration under an agreement between an employer and an employee compel arbitration under that agreement? The Eighth Circuit held that a supervisor charged with discriminatory conduct by an employee may seek to enforce an employer-employee arbitration agreement that covers such conduct under the FAA, notwithstanding state law, because there is a sufficiently close relationship between the non-signatory to the arbitration agreement (the supervisor) and the employer.⁹

The significance of this Eighth Circuit case is that supervisors who are sued in their personal capacities for aiding and abetting discrimination in employment may be able to enforce an arbitration agreement, whether or not the employer itself seeks to do so. Defendant’s counsel may find this a useful tool to force arbitration on behalf of a supervisor when an employer might be inclined to...