Arbitration is often a preferred method of resolving disputes, and many commercial agreements today contain arbitration clauses. Arbitration has become so common that arbitration clauses are often treated as boilerplate provisions during the drafting process, with even sophisticated counsel and clients giving less attention to the arbitration clause than other provisions. This is particularly so as to arcane but consequential aspects of arbitration law.
This article addresses one of these areas — the law applicable to threshold arbitrability issues in the 9th Circuit. Counsel should not assume that a general choice-of-law clause will dictate what law applies to threshold arbitrability issues and should include specific language opting out of federal law if the parties intend for state law to apply to such issues.
One of first questions is what law governs the parties’ obligation to arbitrate. This is not as simple as it might first seem, especially as to gateway issues of arbitrability. These gateway issues include, among other things, whether the parties have agreed to arbitrate the particular dispute and who decides whether the dispute is arbitrable. Many lawyers instinctively assume that the general choice-of-law clause governs both substantive state law issues as well as gateway issues of arbitrability. Following this instinct can lead to costly mistakes because the Federal Arbitration Act, which applies to a contract “involving interstate commerce,” has been held by some courts to apply to arbitrability issues notwithstanding a general choice-of-law provision specifying state law. Federal law can lead to different results than state law on such issues.
Given its reach, the FAA applies to many commercial agreements containing arbitration clauses and ordinarily applies to threshold arbitrability issues unless there is “clear and unmistakable” evidence to the contrary. Contracting parties can agree that state arbitration law applies, rather than federal law, or opt out of the FAA entirely. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010). The question is what constitutes “clear and unmistakable” evidence of an intent to do so. This can be important in at least two respects: (1) State law may dictate that a particular dispute is not arbitrable; and (2) unlike some state laws, federal law dictates that the courts, not the arbitrators, decide issues of arbitrability. The Rent-A-Center court explained that clear and unmistakable evidence “pertains to the parties’ manifestation of intent.” This evidence can take any form, including the parties’ conduct, but in most cases the courts focus on the language of the parties’ agreement.
How courts in the 9th Circuit treat contract language in this context may come as a surprise to lawyers who have not dealt with generic choice-of-law language in the arbitrability context. Some courts have held that a general choice-of-law clause evidences an intent to have substantive state law apply to a dispute but does not provide clear and unmistakable evidence as to questions of arbitrability, resulting in federal law applying to arbitrability questions.
Courts distinguish between substantive law made applicable by a general choice-of-law clause and the law applicable to arbitrability. Two cases illustrate this point. In Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914, 921 (9th Cir. 2011), the parties agreed that “[a]ny dispute arising under this Agreement shall be settled by arbitration in London, England, in accordance with the English Arbitration Act 1996 and any amendments thereto, English law and practice to apply.” Later, one of the parties filed suit against the other for gross negligence, with the defendant responding by moving to compel arbitration. Many lawyers might conclude that English law would apply in resolving the issue of whether the gross negligence claim was arbitrable.
But the 9th U.S. Circuit Court of Appeals held that there was “no clear and unmistakable evidence that the parties agreed to apply English arbitrability law.” The court found that “[u]nder this provision, English arbitration law clearly applies to disputes that are subject to arbitration, and English law and practice are to be applied by the arbitrator …. However, the agreement is ambiguous concerning whether English law also applies to determine whether a given dispute is arbitrable in the first place. Faced with such an ambiguity, we conclude that federal law applies to determine arbitrability.” The court reasoned that “[l]ike the question of who should decide arbitrability, the question of what law governs arbitrability is ‘rather arcane’” and contracting parties are unlikely to give it much thought. “Thus, if courts were to interpret silence or ambiguity concerning the applicable arbitrability law as providing for a non-federal arbitrability law, parties could be subjected to a foreign arbitrability law when they reasonably thought that federal arbitration law would apply.” The court therefore held that federal, not English, law applied to determine the arbitrability of the dispute.
A similar issue was addressed in Anderson Plant v. Batzer Construction, Inc., 2014 WL 800293 (E.D. Cal. 2014), a case involving a construction dispute. After the parties initiated arbitration, the owner discovered that the contractor was not properly licensed under state law, which precluded an unlicensed contractor from recovering payment. The contract provided that it “shall be governed by the law of California, including California law governing … arbitration proceedings.” The owner argued this was clear and unmistakable evidence the parties intended California law to govern whether the licensure dispute was arbitrable. Following Cape Flattery, the court held that the agreement is “silent as to whether California law also applies to whether a particular dispute is arbitrable in the first place.” Accordingly, the Anderson court applied federal law and found the contractor-licensure dispute was arbitrable, even though the dispute would not be arbitrable under state law.
As Cape Flattery and Anderson demonstrate, if the parties intend for state law to apply to questions of arbitrability, the parties should be as clear as possible in the contract that state law applies to these threshold issues. As the Supreme Court has found, a generic choice-of-law provision, standing alone, is insufficient to overcome the presumption that the FAA applies. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63-64 (1995). The 9th Circuit in Cape Flattery also found that a general choice-of-law clause in the arbitration provision itself, standing alone, may not be clear and unmistakable evidence to opt out of the FAA as to arbitrability issues absent language indicating that the chosen law “applies to determine whether a given dispute is arbitrable in the first place.” Thus, parties who intend to have state law apply to gateway issues and to opt out of federal law on such issues should consider inserting express language that state law applies to all arbitrability issues.
The same lesson of clarity applies for other gateway issues like whether the arbitrator or the court decides the issues of arbitrability. Some courts have held that an agreement that “any dispute arising out of or related to the agreement shall be submitted to arbitration” is, standing alone, insufficient evidence that the parties intended the arbitrator to decide the issue of arbitrability, rather than a court. The 9th Circuit has found that “clear and unmistakable” evidence exists to allow the arbitrator to decide threshold questions of arbitrability when the arbitration provision incorporates arbitration rules like AAA Commercial R-7(a) that specify an arbitrator decides the issue of arbitrability. Brennan v. OPUS Bank, 796 F.3d 1125, 1129 (9th Cir. 2015). The 9th Circuit has also found that language delegating to the arbitrators the authority to determine “the validity or application of any of the provisions of” the arbitration clause constitutes clear and unmistakable language that the arbitrators were to decide the threshold question of arbitrability. Momot v. Mastro, 652 F.3d 982, 988 (9th Cir. 2011).
The overall lesson for counsel drafting an arbitration clause is to be as clear and unambiguous as possible. If the intention is to opt out of the FAA and federal law in favor of state law as to gateway issues, counsel may consider, among other things, including explicit language that federal law and the FAA do not apply and that state law applies to (1) all procedural aspects of the arbitration, and (2) issues of arbitrability, including that the arbitrator, not the courts, will decide whether a dispute is arbitrable. As noted above, all of the evidence is to be considered in determining whether the parties intended to opt out of the FAA. Where parties rely solely on a general choice-of-law clause as a basis to opt out of federal arbitrability law, they may become unnecessarily embroiled in a dispute over what law applies that may result in an unsatisfying outcome. Disputes over arbitrability can be minimized and avoided by drafting a clear arbitration clause consistent with the language discussed above.
The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.