There’s only one case today, but it is a template for thinking through issues related to the delegation of threshold arbitration issues.

Delegation clauses; Stay v. Dismissal

One of the recurrent issues in ADR jurisprudence is that of delegation – in other words, who decides questions like the unconscionability of an arbitration clause or whether arbitration covers a particular dispute. Judge Pitts addresses those questions and more in a very well-organized, thoughtful opinion in Davenport v. Nvidia Corp., 2024 U.S. Dist. LEXIS 34483 (N.D. Cal., February 28, 2024). The court first distinguishes between issues of contract formation – i.e., did the parties enter into an agreement – from those related to interpretation of the arbitration clause resulting from that agreement. The formation question is always reserved to the court, while the parties may delegate to the arbitrator the other gateway issues, which would normally be resolved by the judge.  To do so, however, they must use language that is “clear and unequivocal.”

Until this point, the opinion, while providing a path as to how to think through a delegation issue, breaks no new ground. Where Judge Pitts’ decision becomes interesting is in his approach to the question of whether an agreement’s reference to an arbitral forum constitutes a delegation when the forum’s rules give the arbitrator discretion to decide his or her own jurisdiction.  The nearly universal rule is that, when an agreement says that arbitration is subject to the rules of the American Arbitration Association, JAMS, or another forum with such a provision, the parties are deemed to have delegated gateway issues, other than formational ones, to the arbitrator.  In other words, while a court would normally decide whether a dispute falls within the scope of the arbitration clause, if the parties incorporate such rules the arbitrator makes that determination.  While he recognizes the general rule, Judge Pitts distinguishes the subject agreement.  Here, the dispute resolution provision stated that the parties would “submit the dispute to binding arbitration before an arbitrator from Judicial Mediation and Arbitration Services (“JAMS”) . . . under the Optional Expedited Arbitration Procedures then in effect for JAMS.” However, the court opines, the agreement “does not explicitly state which rules apply. . . .” (Emphasis in original).  The court views the reference to the Expedited Procedures as irrelevant, holding that those rules merely establish tight deadlines and limit discovery, and opining that “these procedures. . . do not themselves include a delegation provision.”  Further, Judge Pitts states, JAMS has various sets of rules for different types of disputes, and the contract applies the JAMS which are “then in effect.”  This flexibility, the court states, is inconsistent with a clear and unequivocal decision to delegate threshold issues.

The court, then, decides questions of unconscionability and scope in favor of Defendant, in accord with the normal analysis in such cases, and compels arbitration.

That holding, however, raises the issue of whether to stay the litigation or dismiss the action.  The specific language of Section 4 of the Federal Arbitration Act merely provides that a court should stay the pending action upon compelling arbitration.  However, various Circuits, including the Ninth which covers California, have held that a court’s general control of litigation allows dismissal when it orders that all claims in the case should be arbitrated, Forrest v. Spizzirri, 62 F. 4^th 1201 (9^th Cir. 2023).  SCOTUS has scheduled argument in Forrest, sub nom Smith v. Spizzirri, Dkt. No. 22-1228, for April 22, 2024, in order to address whether dismissal exceeds the court’s authority under the FAA.  Judge Pitts, in dismissing this action, stays his order until July 1, 2024, by which time SCOTUS should have ruled.  “If the Supreme Court holds that dismissal is not permissible, the stay will remain in place until arbitration is complete.”

Two lessons from the case – For courts, the decision’s treatment of the stay v. dismissal issue, pending SCOTUS’s action in Smith, makes a lot of sense. For contract drafters, if you intend to invoke the rules of one of the Tribunals, say so in a totally unambiguous way; use the words “Rules of [the forum].”  Otherwise, you risk having a judge find a way to tread through your delegation.

Have a great weekend.  Spring is only a couple of weeks away.          

David Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com