Opinion ID: 4438150
Heading Depth: 2
Heading Rank: 1

Heading: The Law Governing the Scope of Arbitration

Text: The Federal Arbitration Act (FAA) reflects the “national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006); see 9 U.S.C. § 2 (“A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy . . . arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”). Because the underlying principle of all arbitration decisions is that “arbitration is strictly a matter of consent,” 3 The District Court had jurisdiction under 28 U.S.C. §§ 1331 and 1367(a). Although there has been no final judgment, we have jurisdiction under the Federal Arbitration Act, which permits interlocutory appeals from an order denying a motion to compel arbitration. See Zimmer v. CooperNeff Advisors, Inc., 523 F.3d 224, 228 (3d Cir. 2008); 9 U.S.C. § 16(a)(1)(B) (providing that an appeal may be taken from an order denying a petition to compel arbitration). “We exercise plenary review over questions of law concerning the applicability and scope of arbitration agreements.” Zimmer, 523 F.3d at 228 (citation omitted). 7 Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019) (alterations omitted) (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010)), the “FAA requires courts to ‘enforce arbitration agreements according to their terms,’” Lamps Plus, 139 S. Ct. at 1415 (quoting Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018)). But before compelling any party to arbitrate pursuant to the FAA, a court must consider two “gateway” questions: (1) “whether the parties have a valid arbitration agreement at all” (i.e., its enforceability), and (2) “whether a concededly binding arbitration clause applies to a certain type of controversy” (i.e., its scope). Id. at 1416–17 (citation omitted); see Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 160 (3d Cir. 2009). As we recently observed in Jaludi v. Citigroup, No. 163577, 2019 WL 3558978 (3d Cir. Aug. 6, 2019), “[i]n applying state law at step one, we do not invoke the presumption of arbitrability.” Id. at  (citations omitted). “At step two, however, ‘in applying general state-law principles of contract interpretation to the interpretation of an arbitration agreement . . . due regard must be given to the federal policy favoring arbitration.’” Id. (quoting Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 475 (1989)). Here, because “the parties do not contest the enforceability of the Agreement’s arbitration provision,” In re Remicade Antitrust Litig., 2018 WL 5314775, at , this case turns on step two, that is, whether the alleged antitrust violations fall within the scope of the Agreement’s arbitration clause providing for arbitration of any “controversy or claim arising out of or relating to” the Agreement, JA 188. The parties disagree as to the applicable body of law used to interpret the scope of that clause. While J&J argues that it “is a matter of federal law” and the federal presumption 8 in favor of arbitration therefore ends the inquiry, J&J Br. 8–9 (quoting Century Indem. Co. v. Certain Underwriters at Lloyd’s, 584 F.3d 513, 524 (3d Cir. 2009) (quoting China Minmetals Materials Imp. & Exp. Co. v. Chi Mei Corp., 334 F.3d 274, 290 (3d Cir. 2003))), RDC contends that courts must apply “‘ordinary state law principles to evaluate arbitration agreements’ (so long as they do not conflict with the FAA),” RDC Br. 18 (quoting MacDonald v. CashCall, Inc., 883 F.3d 220, 228 (3d Cir. 2018)). The truth, we conclude, lies somewhere in between. While RDC’s view generally accords better with Supreme Court precedent, at least as the starting point, see Lamps Plus, 139 S. Ct. at 1415, we take this opportunity to delve into the interplay between state and federal law and, in the process, to clarify our Court’s case law. To place our holding today in context, we briefly review our case law to date. Early on, we held that “whether a particular dispute is within the class of those disputes governed by the arbitration and choice of law clause is a matter of federal law.” Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 43 (3d Cir. 1978). But the Supreme Court disagreed, holding in First Options of Chicago, Inc. v Kaplan, 514 U.S. 938 (1995), that “[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.” Id. at 944. And we acknowledged that disagreement in China Minmetals, where we observed that under Becker, “federal law applie[d] to the interpretation of arbitration agreements,” China Minmetals, 334 F.3d at 290 (alterations and citations omitted), and then “recognized, however, that the Supreme Court in First Options stated that a court deciding whether the parties agreed to arbitrate a certain matter should apply ‘ordinary state-law 9 principles governing contract formation,’” id. (citation omitted). In China Minmetals, however, we did not have occasion to hold that Becker was abrogated because “whether we appl[ied] federal law or New Jersey law, the result [was] the same.” 334 F.3d at 291. But in Moon v. Breathless Inc., 868 F.3d 209 (3d Cir. 2017), the issue was squarely presented, and we definitively announced, as to “an arbitration clause’s scope,” that “[p]ursuant to the precedent of the Supreme Court of the United States, state law applies: ‘When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary statelaw principles that govern the formation of contracts.’” Id. at 212–13 (quoting First Options, 514 U.S. at 944). In the case before us today, notwithstanding First Options and Moon, J&J insists that an arbitration clause’s scope “is a matter of federal law,” so that the federal antitrust claims at issue here necessarily fall within the scope of the Agreement based on the federal presumption of arbitrability. J&J Br. 9 (emphasis omitted) (quoting Century Indem., 584 F.3d at 524). J&J’s argument is premised on Century Indemnity—an opinion issued between China Minmetals and Moon. There, although we ultimately concluded that the arbitration clause was broad enough to include the dispute at issue “with or without the [federal] presumption of arbitrability,” Century Indem., 584 F.3d at 556, we also stated that “the determination of whether ‘a particular dispute is within the class of those disputes governed by the arbitration clause . . . is a matter of federal law,’” id. at 524 (quoting China Minmetals¸ 334 F.3d at 290). 10 Century Indemnity is not controlling here for three reasons. First, as apparent, the language concerning the governance of federal law was ultimately dictum. It was also incomplete. The quoted language from China Minmetals was itself quoting Becker, and we proceeded to then acknowledge in the very next sentence that Becker’s approach was contrary to that taken by First Options. Century Indem., 584 F.3d at 524 (quoting China Minmetals¸ 334 F.3d at 230 (quoting First Options, 514 U.S. at 944)). Yet Century Indemnity quoted only the first sentence and omitted the second. Whether an oversight or omission, we must pay heed to intervening Supreme Court precedent. See Karns v. Shanahan, 879 F.3d 504, 514–15 (3d Cir. 2018). Second, when the choice of state or federal law governing the scope of an arbitration clause was squarely before us in Moon, we held, relying on First Options, that “state law applies” and proceeded to apply it. Moon, 868 F.3d at 213. We are bound to follow our Circuit’s precedent, so Moon is controlling. See Karns, 879 F.3d at 514 (quoting 3d Cir. I.O.P. 9.1). Third, as we also recognized in Moon, “the precedent of the Supreme Court of the United States” has made clear that state law serves as the baseline for ascertaining an arbitration clause’s scope, notwithstanding the fact that federal law may also, under certain circumstances, have a role to play. 868 F.3d at 212–13; see Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 681 (2010) (“While the interpretation of an arbitration agreement is generally a matter of state law, the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration is a matter of consent, not coercion.” (internal quotation marks and citations omitted)); Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630 11 (2009) (holding that the FAA “creates substantive federal law . . . requiring courts to place [arbitration] agreements upon the same footing as other contracts,” but that nothing in the FAA “purports to alter background principles of state contract law regarding the scope of [arbitration] agreements” (internal quotation marks citation omitted)). So, what is the role of federal law in interpreting the scope of an arbitration agreement? As we noted in Jaludi, “in applying general state-law principles of contract interpretation to the interpretation of an arbitration agreement . . . due regard must be given to the federal policy favoring arbitration.” 2019 WL 3558978, at  (quoting Volt Info. Scis., 489 U.S. at 475). Thus, the federal law favoring arbitration embodied in the FAA “provides the default rule” where no state law definitively determines whether a given claim is inside or outside the scope of an arbitration agreement. Lamps Plus, 139 S. Ct. at 1418 (noting that the Supreme Court “ha[s] repeatedly held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration” (citations omitted)); see White v. Sunoco, Inc., 870 F.3d 257, 262 (3d Cir. 2017) (“[T]he presumption of arbitrability applies only where an arbitration agreement is ambiguous about whether it covers the dispute at hand. Otherwise, the plain language of the contract holds.” (citation omitted)). And certain general principles of federal law apply in resolving that ambiguity, see, e.g., Battaglia v. McKendry, 233 F.3d 720, 725 (3d Cir. 2000) (noting that this presumption is “particularly applicable where the arbitration clause at issue is broad”), and enforcing arbitration agreements, see, e.g., Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013) (noting that “courts must rigorously enforce arbitration agreements according to their terms (internal quotation marks and citation omitted)). 12 Additionally, federal law may also come into play by way of preemption. For example, federal law will preempt otherwise-applicable state law that would invalidate an agreement to arbitrate not simply by application of “generally applicable contract defenses, such as fraud, duress, or unconscionability,” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)), but rather because it violates the FAA’s so-called “equal-treatment principle”—that is, if it “appl[ies] only to arbitration or [] derive[s] [its] meaning from the fact that an agreement to arbitrate is at issue,” Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017) (citation omitted). And just this past term, the Supreme Court held that a state law rule of contra proferentem was preempted to the extent it was used to construe an agreement to arbitrate claims on a classwide basis and, thus, to the extent it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.” Lamps Plus, 139 S. Ct. at 1416 (internal quotation marks omitted) (quoting Concepcion, 563 U.S. at 352); accord Stone v. Doerge, 328 F.3d 343, 345 (7th Cir. 2003) (Easterbrook, J.) (explaining that while “most interpretive disputes must be resolved under state law,” federal law “does affect . . . the extent to which state law may specify special rules for arbitration: any rule of state law disfavoring or prohibiting arbitration for a class of transactions is preempted” (citation omitted)). In sum, while federal law may tip the scales in favor of arbitration where state interpretive principles do not dictate a clear outcome, see, e.g., White, 870 F.3d at 262, may displace state law through preemption, see, e.g., Lamps Plus, 139 S. Ct. at 1416, or may inform the interpretive analysis in other ways, see, e.g., Battaglia, 233 F.3d at 725; Am. Express, 570 U.S. at 13 233, applicable state law governs the scope of an arbitration clause—as it would any other contractual provision—in the first instance.4 We therefore turn to the question of the scope of the arbitration clause before us, looking to the applicable state law—that of New Jersey.5