While there was little arbitration jurisprudence over the last few days, on Friday the Second Circuit issued a decision that could drive courts to take a more nuanced look at the delegation of gateway questions of arbitrability to the arbitrator.

AAA Rules and Competence-competence

Courts routinely hold that an agreement’s incorporation of arbitral institution rules which allow the tribunal to decide its own jurisdiction delegates questions of arbitrability to the panel. DDK Hotel, LLC v. Williams-Sonoma, Inc., 2021 U.S. App. LEXIS 21862 (2^nd Cir. July 23, 2021), calls the scope of that precept into question.  The holding is a big deal in the litigation of motions to compel arbitration.

Citing the Circuit’s decision in Doctor’s Associates, Inc. v. Alemayehu, 934 F. 3d 245 (2^nd Cir. 2019), the Court begins with the proposition that “’threshold questions of arbitrability,’ such as whether the arbitration agreement applies to a particular dispute, ‘presumptively should be resolved by the court and not referred to the arbitrator.’”  It, then, moves to the Supreme Court’s decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), which held that delegation of any gateway issue to the arbitrator requires “clear and unmistakable evidence” that the parties intended to do so.   Circuit Judge Sack, writing for himself and Circuit Judges Lynch and Park, holds that the language of the subject arbitration clause does not present such “evidence.”

The dispute arises out a failed joint venture. Plaintiff sought reimbursement of attorneys’ fees which it incurred in connection with previous litigation between the parties; Williams-Sonoma moved for arbitration.  The District Court held that it, not the arbitrator, should decide arbitrability and that the asserted claim did not fall within the scope of the arbitration clause. Williams-Sonoma took this interlocutory appeal.

The parties’ arbitration clause was not a “broad” one covering all disputes, but, rather, applied only to “Disputed Matters,” which the agreement defined as those “requiring Board or Member approval.”  It provided that such disagreements “may be submitted by either member to binding arbitration administered by the American Arbitration Association (“AAA”) for resolution in accordance with the Commercial Arbitration Rules and Mediation Procedures of the AAA then in effect . . . .”  AAA Rule 7 empowers the arbitrator “to rule on his or her own jurisdiction, including any objections with respect to the . . . the arbitrability of any claim or counterclaim.”

The Court holds that, because of the agreement’s narrow arbitration clause, only Disputed Matters are governed by the AAA Rules.  If the parties’ dispute raises any other question, there is no referral of the merits to the AAA and none of its rules, including those invoking competence-competence, clearly apply.  Reading the absence of such clarity as undercutting the requirement of a “clear intent to delegate,” the panel holds that the lower court properly retained jurisdiction over the arbitrability question.  Opining that the matter at issue is not a “Disputed Matter,” it affirms the District Court’s denial of Defendant’s motion to compel arbitration.

In a word to drafters, the court gives clear guidance to those who want to delegate all threshold issues to the tribunal. “The parties could have unambiguously delegated arbitrability to the arbitrator by including a provision expressly stating that all disputes concerning arbitrability would be resolved the arbitrator.  They did not do so.” (Emphasis added).

During its last Term, the Supreme Court issued a DIG (dismissal of certiorari as improvidently granted) to the latest embodiment of Henry Schein, Dkt. No. 19-963, even though it had already heard oral argument.  The initial grant of cert. addressed a question – “whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator” – closely linked to that resolved by the court here.  Perhaps this case will now become the vehicle for SCOTUS to give us some guidance on delegation and tribunal rules.  In the meantime,  DDK Hotel takes on great importance.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com