07.23Pockets of Resistance Remain on Enforcing Agreements to “Arbitrate Arbitrability”
In various posts on this site over the three-plus years of its existence, Arbitration Commentaries has reported on court decisions that recognized the power of an arbitrator to decide “arbitrability” questions when the arbitration agreement calls for arbitration under rules that confer power on the arbitral tribunal to decide upon objections to its jurisdiction.
Last week the US Fifth Circuit Court of Appeals joined forces with at least the First, Second, Eighth, Eleventh and Federal Circuits, in holding that when parties agree to arbitrate under such rules, there is “clear and unmistakable evidence” that they have agreed to arbitrate arbitrability. Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 2012 WL 2892401 (5th Cir. July 17, 2012).
But even as the head-count of federal appeals courts embracing this principle was increasing by one, there were two district court decisions earlier this month — one in the Second Circuit, where the law is supposedly settled — that declined to apply it. This inconsistency invites a question: whether the principle of “agreement to arbitrate arbitrability” is adequately defined in the case law, so that judges will recognize the situations in which it should be applied.
It may or may not be analytically significant that each of the two recent district court cases in which the principle was not applied involved (i) a motion to compel arbitration in an action or proceeding before the court, (ii) no arbitration yet pending, and (ii) a request to compel arbitration of fewer than all issues presented in the case.
The first case was a high-stakes patent license/infringement dispute before a Virginia federal district court, between German and US companies. (Bayer Cropscience AG v. Dow Agrosciences LLC, 2012 WL 2878495 (E.D. Va. July 13, 2012)). The license agreement provided for arbitration under the ICC Rules. The parties agreed that issues of whether the license had been breached and lawfully terminated were arbitrable, but disagreed over arbitrability of patent infringement issues. Taking note of the “persuasive authority” of several federal circuits, and that there was a recent district court decision in the Virginia district adopting the principle, but also taking into account that the Fourth Circuit had not addressed the issue so that it “remained unsettled,” and that the general rule in the Fourth Circuit has been that questions of arbitrability are for the courts, the court held that “it may determine this threshold issue of arbitrability.” The Court proceeded to hold that the claims of patent infringement, in addition to the claims of license breach and termination, were arbitrable.
The second district court case, a Magistrate Judge’s Report in a New York federal court, is more unusual — for a number of reasons including the participation of this writer as counsel for certain parties. (Cardell Financial Corp. v. Suchodolski Associates, Inc., No. 09 Civ. 6148, slip op., ECF Docket Entry #102 (S.D.N.Y. July 17, 2012). The parties had engaged in multiple international arbitrations and collateral judicial proceedings in New York and Brazil since 2003. Eventually there was a final arbitration award that included an anti-suit injunction that forbade the award-loser to start any proceedings relating to the contracts at issue until the damages portion of the award had been satisfied. The District Court confirmed the award and the Second Circuit affirmed the confirmation, giving the arbitral anti-suit injunction the status of a final judgment of the district court. The award-loser then commenced a new lawsuit in Brazil, and the winner brought a contempt proceeding in the Southern District of New York, saying the injunction portion of the judgment had been violated. The loser/putative contemnor argued that the new Brazil suit was not related to the contract, and that whether this was correct required interpretation of the contract, and therefore required an arbitration. Further, whereas the arbitration clause provided not only for arbitration under AAA commercial arbitration rules but also expressly made arbitrable disputes over the scope of the arbitration clause, the putative contemnor cross-moved to compel arbitration of the arbitrability issue as well as the merits of whether the new Brazil lawsuit was related to the contract.
The Magistrate Judge’s report recommends denial of the motion to compel arbitration, not citing case law but holding in essence that this contempt proceeding presents a dispute solely concerning the language of the Court’s judgment, not the underlying contract, even though the scope of the judgment’s injunctive prohibition depends on whether the newly-commenced proceeding allegedly violating the injunction is “related to” the contract.
I will not argue here the merits of a case that is sub judice for one of my own clients. But I will note that in both recent instances where the courts declined to apply the “agreement to arbitrate arbitrability” principle, they were being asked to compel arbitration of the arbitrability issue, whereas in the recent Fifth Circuit case the issue was whether the arbitrator’s jurisdiction decision, presented for review with a final award, was to be reviewed de novo or with the same limited scope as any other arbitrable issue. The procedural posture of a completed arbitration understandably presented a less inviting situation for judicial control.
Does it, or should it, make a difference whether the question arises in a pre- or post-arbitration context? The same question is presented in either context: what did the parties agree to submit to arbitration? Perhaps what we see is that courts are more readily convinced of the parties’ intent to submit an arbitral jurisdiction issue to arbitration when the parties have already arbitrated and the loser is seeking expanded judicial review, or at least when there is pending a “live” arbitration in which some issues clearly must be arbitrated. In contrast, when one party is seeking to litigate the entire dispute, and perhaps no arbitration has yet begun, the agreement to arbitrate under rules that empower an arbitrator to resolve jurisdiction issues may look like a less convincing basis to draw any definite conclusions about the intentions of the parties to arbitrate the commercially obscure issue of arbitrability.
But under the case law of the circuits that have adopted the “arbitrate arbitrability” principle, these distinctions should not matter. The principle vindicates the parties’ ability to resolve disputes within a semi-autonomous legal system that largely stands alongside the judiciary rather than being a subordinate process subject to judicial control. Whether the arbitrability issue arises pre-, post-, or mid-arbitration, courts should respect clearly expressed intentions to commit arbitrability decisions to arbitral determination.