Happy summer! It’s been far too long since my last update, but rest assured I have been thinking a lot about arbitration. In fact, I’m currently teaching a summer course at Queen Mary University of London’s International School of Arbitration, which is a ton of fun.
My teaching, in fact, partly inspired this post. Teaching arbitration in an international context reminds me of the fact that the United State’s permissive “everything can be arbitrated” approach isn’t universal or inevitable. Plus, the Sixth Circuit recently issued a deceptively simple decision, in Arabian Motors Group v. Ford Motor Co., 2019 WL 2305313 (May 30, 2019), which raises some significant arbitration policy issues, particularly with respect to subject matter arbitrability and delegation.
A quick clarification of terminology first. Though courts tend not to be clear about various branches of arbitrability, it’s useful to distinguish between them. By “subject matter arbitrability,” I mean the power of an arbitrator to hear certain categories of disputes as a matter of public policy. In the United States, there are virtually no subject matter constraints on arbitration. But there are a handful, and Arabian Motors implicates one of them: 15 U.S.C. § 1226.
In relevant part, § 1226 says that “whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy.”
The dispute in Arabian Motors centered on Ford’s termination of a franchise with a Kuwaiti company selling cars in the Middle East. Briefly, the Kuwaiti company argued that § 1226 prevented enforcement of the pre-dispute arbitration clause in its contract with Ford. It went further and argued that a court – not the arbitrator – needed to decide the applicability of § 1226.
The district court disagreed. While compelling the parties to go to arbitration, the district court concluded that the arbitrator, not the court, should decide whether § 1226 undermined the arbitrator’s ability to hear the dispute. The arbitrator considered the statute and decided that it didn’t apply extraterritorially. Then, on the merits, the arbitrator ruled in favor of Ford. The Kuwaiti company sought to vacate the award, and the district confirmed it.
An appeal followed. Perhaps because the Kuwaiti company had framed up its complaint as being about manifest disregard, the Sixth Circuit merely focused on whether the arbitrator had made a decision that flew “in the face of clearly established legal precedent.” Because the issue was one of first impression in the United States, the court reasoned that “the arbitrator, at most, could have made an ‘error in interpretation or application of the law’ and that is ‘insufficient’ to constitute a manifest disregard for the law.” The court never really engaged with the “who decides” question. Accordingly, the Sixth Circuit affirmed the lower court.
The case is simple on the surface, but it raises some significant issues and it conflicts, I think, with the logic of SCOTUS in New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019).
Although there are currently precious few subject matter limits on arbitration in the U.S., there are constant calls for arbitration reform at the federal level. As the drama surrounding the CFPB’s short-lived 2017 arbitration rule indicated, those efforts are fraught, but they are also always bouncing around the margins of arbitration practice. To the extent that congress might and could create additional limits on arbitration, a case like Arabian Motors takes on tremendous importance. Who decides whether a statutory subject matter limitation on arbitration applies, a court or an arbitrator?
New Prime suggests strongly, I think, that it must be a court. Remember, in New Prime, SCOTUS was considering whether the employment exemption in § 1 of the FAA applied to independent contractors. In its analysis, the majority (which included everyone except Justice Kavanaugh) says that the Court has “long stressed the significance of the [FAA’s] sequencing.” Although “a court’s authority under the Arbitration Act to compel arbitration may be considerable, it isn’t unconditional.” Instead, the FAA’s authority “doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” This lead to the conclusion that a court must decide whether § 1’s exclusion applies before ordering arbitration, even if the arbitration agreement contains a delegation clause. It seems to me that the same logic should apply to any other congressional act that regulates the recourse to arbitration.
The point, I think, that is that New Prime suggests that there’s a difference between contractual arbitrability – issues about flaws in the arbitration agreement, scope of the arbitration agreement, or procedural preconditions that need to be satisfied before the recourse to arbitration is appropriate – and subject matter limits on what can be arbitrated. Parties are free to assign the former questions to an arbitrator through a delegation clause. But because certain subjects are – or could be – excluded from the federal policy favoring arbitration – like disputes arising out of a motor vehicle franchise agreement – parties cannot assign an arbitrator to arbitrate about whether the exclusion applies.