A recent case demonstrates how you can lose key advantages provided by arbitration when it isn’t clear who is to decide whether claims are arbitrable. Let’s see what lessons we can draw from the case, Glacier Park Iron Ore Properties, LLC, v. United States Steel Corporation, No. A19-1923 (Minn. June 30, 2021).
The advantages of arbitration
Arbitration has many advantages for commercial disputes. Done right, it is a cheaper, faster, and more convenient way to resolve the dispute. But if you must first go to court to determine whether the case will be arbitrated, you’ve already lost some of the key advantages to arbitration. Instead of bypassing the court, you might find the first stop on your journey to getting the disputer resolved is the courthouse, adding to delay and expense.
Arbitration is favored
Arbitration is a creature of contact, so the parties to a commercial contract can agree to resolve disputes by arbitration. Federal law, embodied by the Federal Arbitration Act (FAA), favors arbitration. Because the FAA – and not state law – applies to most contracts involving interstate commerce, your chances of upholding an arbitration clause are good. Any doubt about whether a claim in arbitration is subject to an agreement to arbitrate should be resolved in favor of arbitration. Moses Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 -25 (1983). But do you have to go to a court to get the matter resolved?
With a poorly drafted arbitration clause, you may. Which brings us to the Glacier Park case.
Glacier Park had a disagreement with U.S. Steel over a lease agreement. The parties’ agreement had an arbitration clause. Glacier Park asked the district court to stay court proceedings and compel arbitration. But the district court decided it – and not the arbitrator – should decide whether the dispute was arbitrable. It then decided it was not. The court of appeals affirmed.
Glacier Park then sought and received review from the Minnesota Supreme Court.
The threshold issue was whether a court or arbitrator should decide what claims were subject to arbitration. The FAA applied because the contract involved interstate commerce. Under the FAA, the parties can agree that an arbitrator will decide arbitrability. But courts will not assume the parties agreed to arbitrate arbitrability unless there is “clear and unmistakable evidence they did so.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-44 (1995).
In the Glacier Park case, the parties’ arbitration clause did not clearly provide that arbitrability of the claim was itself subject to arbitration. A quick skim of the clause reveals that nothing specific was said about the arbitrator deciding arbitrability. It read:
In the event that any disagreement or controversy arises between [Glacier Park] and [U.S. Steel] as to whether any of [U.S. Steel]’s mining practices conform to the standards stipulated herein, or as to any fact that might affect the determination of royalty payable hereunder, or as to any fact relative to the observance or fulfillment of the terms and obligations hereof by either party, or as to any other matter herein specifically stated to be the subject of arbitration, then either party may demand that such disagreement or controversy shall be determined by final and binding arbitration in the manner hereinafter provided.
Since the decision was not clearly given to the arbitrator, the Supreme Court ruled that the issue was for the court to decide.
And the lesson is . . .?
Once you know the issue, the fix is simple. Simply state in the arbitration clause that the arbitrator is to decide whether any claim is subject to arbitration. Make it “clear and unmistakable” that decision is for the arbitrator.
Now before you start worrying too much about the last arbitration clause you drafted, let’s consider an issue that didn’t come up in the Glacier Park case. The rules of most arbitral organizations provide that the issue of arbitrability is for the arbitrator. See, e.g., AAA Commercial Rule R-7(a)(“The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”) And many courts have found that adopting the rules of an organization is a clear indication the parties have agreed the arbitrator is to decide. See Blanton v. Domino’s Pizza Franchising LLC, 962 F. 3d 842, 846 (6th Cir. 2020)(Noting eleven out of twelve federal circuit courts of appeal “have found that the incorporation of the AAA Rules (or similarly worded arbitral rules) provides ‘clear and unmistakable’ evidence that the parties agreed to arbitrate ‘arbitrability.’”)
So, if your arbitration clause provides that claims arising from or relating to the contract are to be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules – to paraphrase model AAA clause language – the arbitrator will decide the issue.
Out of an abundance of caution, you may still decide to specifically state in your clause that arbitrability is for the arbitrator. But you can take some comfort that, in the end, the detour to the courthouse is likely to be short if you have use AAA rules or those of another provider that say arbitrability is for the arbitrator.
David Allgeyer has been arbitrating IP and commercial disputes for over 19 years and is the author of Arbitrating Patent Disputes, A Practical Guide (available at shopaba.org and through Amazon books). You can reach him at [email protected] and find his website at daveadr.com.