Marc J. Goldstein Arbitrator & Mediator NYC
July 30, 2013

The Ninth Circuit’s New Arbitrability Decision: More Food For Thought About Competence-Competence A L’Americaine

Last week’s decision by the US Ninth Circuit Court of Appeals that incorporation of the UNCITRAL Rules in an arbitration clause is considered as a matter of federal arbitration law to be a clear and unmistakable delegation to the arbitrators of exclusive power to decide the scope of arbitrable issues — [Oracle America, Inc. v. Myriad Group A.G., 2013 WL 3839668 (9th Cir. July 26, 2013)] — may at first blush appear to be uneventful news, at least for practitioners who do not practice in the 9th Circuit or often frequent its federal district courts to pursue or resist arbitration. The view from 37,000 feet — good for admiring California’s High Sierras, less ideal for appreciating its federal arbitration jurisprudence — might be that this is only an instance of another appellate court leaping on a bandwagon already occupied by most of its “sister” federal appellate circuits. But this case had some curious elements that the Court did not address.

Greatly simplified, this case involved an IP license for a Swiss company to make use of Java software, one of Oracle’s major products.  But the arbitration clause in the license was also a litigation clause. It said that all disputes under the license shall be arbitrated, except that either party could opt to litigate a dispute relating to that party’s “Intellectual Property Rights.” And it said that in a case eligible for litigation, if litigation were elected the court’s jurisdiction would be exclusive.

The clause provided for arbitration under the UNCITRAL Rules, and those Rules of course provide that arbitral tribunals have power to rule on issues of their own jurisdiction. I have referred, in recent posts, to the principle that the adoption of such rules delegates arbitrability to the arbitrators as the Incorporation-by Reference Principle. I will continue to use that shorthand here. Dutifully, your Commentator reviewed all the Incorporation-by-Reference Principle First Options “arbitration of arbitrability” case law cited in the Ninth Circuit’s decision. Not one of the arbitration clauses involved in those cases was this type of hybrid arbitrate-unless-you-litigate formulation. So, the Ninth Circuit might have analyzed in its opinion, but did not, what were the reasonable expectations of the parties as to the forum in which arbitrability would be determined if Oracle filed a trademark/copyright infringement suit in federal court, as it did, and if Oracle alleged, as it did, that the action fell within the express elective litigation carve-out for disputes involving its IP rights.

This case highlights how very little the Incorporation-by-Reference Principle has to do with the actual intentions of the parties. The courts have embraced the Principle largely without analyzing why the parties’ adoption of an arbitration rule of compétence-compétence that empowers arbitrators to decide jurisdiction must necessarily divest a court of such power. That position is a matter of interpretation, which is really to say it is a matter of federal pro-arbitration policy. A main tenet of federal arbitration law is that any doubts about the scope of arbitrable issues are to be resolved in favor of arbitration.  Thus, if an adopted arbitral compétence-compétence rule like UNCITRAL Rule 23(1) (2010) makes arbitrability arbitrable, any doubts about whether that Rule makes the Tribunal’s jurisdiction over arbitrability exclusive are to be resolved in favor of exclusivity.  But this means that what the US federal courts are treating as “clear and unmistakable evidence” is partly evidence and partly presumption — or, stated another way, the “evidence” is only “clear and unmistakable” because of a policy-based rule of construction in the absence of which one would be hard-pressed to characterize such compétence-compétence rules as conferring exclusive arbitrability jurisdiction on arbitrators.

Further, even though most courts have not so stated expressly, a critical contextual element of the Incorporation-by-Reference Principle is that the arbitration clause broadly commits all disputes between the parties to arbitration without material exception. When the contract does not expressly sanction any entrée to a judicial forum for merits adjudication, there is considerable appeal to the position that the arbitral compétence-compétence rule, in context, represents an exclusive forum choice for arbitrability disputes.

Given these dimensions of the Incorporation-by-Reference Principle, it is curious that the Ninth Circuit panel did not spend any energy on the question of whether the express litigation carve-out in the arbitration clause had any significance as evidence of the parties’ intentions. The fact that the panel did not do so does not necessarily mean that the panel’s decision is unsound. It does however confirm our understanding that the Incorporation-by-Reference Principle, as an implementation of the First Options “clear and unmistakable evidence” test, is not genuinely a rule of evidence or a barometer of the intentions of the parties, but a policy-based pro-arbitration federal common law rule on the allocation of power between courts and arbitrators. It may well be a good thing for there to be such a rule. But if we admit that the rule is policy-driven, then we might also hope that the US Supreme Court in a proper case would hold that First Options is a precedent that has outlived its useful life and should be supplanted by express rules of construction, emanating from the FAA, for deciding on the allocation of arbitrability jurisdiction between courts and arbitrators.

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