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December 02, 2014

The Second Circuit Blinks on Competence-Competence

As the compétence-compétence stare-down continues between the U.S. courts and the drafters of the American Law Institute’s Restatement of the Law of International Commercial Arbitration, rather few seem to have taken notice that the U.S. Second Circuit Court of Appeals may have blinked.

The reflexive twitch happened on Halloween (boo!), when the Second Circuit in NASDAQ OMX Group, Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. Oct. 31, 2014) affirmed a preliminary injunction — based upon a judicial first instance determination of non-arbitrability — that prevents UBS from arbitrating claims against the NASDAQ for damages allegedly caused by the exchange’s handling of Facebook’s initial public offering in 2012.

NASDAQ and UBS had a “Services Agreement” whose dispute resolution clause provided for arbitration of all but a carved-out category of disputes, under the AAA Commercial Arbitration Rules. And those AAA Rules provided that the arbitrator “shall have the power to rule on his or her own jurisdiction….”

The Second Circuit has led the way for other federal courts in treating such arbitration rule provisions as “clear and unmistakable evidence” that the parties have agreed to permit arbitrators not courts to decide most issues of “arbitrability,” i.e. whether the arbitrator has jurisdiction — other than the threshold question of whether any agreement to arbitrate was made. But that position, at least per this latest decision of the Second Circuit, is based upon the presence of a “broad” arbitration clause that commits “all disputes” to arbitration, presumably including disputes over the scope of arbitrable issues.

In this instance the clause was not unqualifiedly broad. The carve-out mentioned above made non-arbitrable any disputes relating to (in simplified terms) alleged NASDAQ violations of its self-regulatory obligations imposed by SEC rules and regulations. And the Second Circuit declined to treat the agreement to use AAA Rules in any arbitration as clear and unmistakable evidence of an intent to have arbitrators decide whether UBS’s claims were within the carve-out, because, under the disputes clause as construed by the Court, the AAA Rules only apply to disputes not covered by the carve-out, and the scope of the carve-out is therefore an issue for preliminary judicial determination if raised in court before the arbitration unfolds.

It is probably premature to forecast a complete about-face by the Second Circuit on the compétence-compétence question. But one can readily derive a major limitation here on the allocation of “scope” arbitrability issues to arbitrators: If the scope issue presents the question of whether the entire dispute sought to be arbitrated is non-arbitrable, i.e. whether the arbitrators have any jurisdiction, then the jurisdiction issue is primarily for the court notwithstanding the agreement to arbitrate some but not all disputes under arbitration rules providing for arbitral competence to rule on objections to jurisdiction (meaning it may be resolved judicially on a motion to compel or enjoin arbitration, or it may be reviewed judicially without deference to the arbitrator’s ruling on the matter unless the parties clearly submitted the matter to the arbitrator without reserving the right to full judicial review).

This development in the Second Circuit’s jurisprudence does not, however, squarely confront the Restatement drafters’ position that compétence-compétence provisions typically found in institutional and UNCITRAL international arbitration rules are intended only to enable arbitrators to decide jurisdiction issues provisionally so that arbitration may proceed without the hiatus that would be necessary if only the courts had power to address arbitral jurisdiction objections. Nevertheless there seems to be as discernible shift, with the Second Circuit placing considerably more evidentiary weight on the scope of the agreement to arbitrate than on the selection of arbitration rules, as a measure of whether the parties agreed to have primarily arbitral determination of arbitral jurisdiction questions.