Opinion ID: 221861
Heading Depth: 3
Heading Rank: 1

Heading: Choice of Arbitrability Law

Text: The first issue is what law applies to determine the arbitrability of the dispute. Titan argues that the Agreement's provision 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 constitutes an agreement that English law applies to determine the arbitrability of a dispute. Cape Flattery argues that parties cannot contract out of federal arbitrability law, and that even if they can, the parties did not do so in the Agreement. The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., creates a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Neither the Supreme Court nor this court has decided whether federal arbitrability law allows contracting parties to agree to apply a non-federal law of arbitrability to interpret a given arbitration agreement. If the parties can agree to apply a non-federal arbitrability law, it is also undecided how courts should determine whether the parties have so agreed.
In defending their respective positions regarding the power of contracting parties to agree to a non-federal arbitrability law, Cape Flattery and Titan rely on different Supreme Court decisions. Cape Flattery relies on Mitsubishi Motors. Mitsubishi and Soler entered into a sales agreement that included the following arbitration clause: All disputes, controversies or differences which may arise between [Mitsubishi] and [Soler] out of or in relation to... this Agreement or for the breach thereof, shall be finally settled by arbitration in Japan in accordance with the rules and regulations of the Japan Commercial Arbitration Association. 473 U.S. at 617, 105 S.Ct. 3346 (first two alterations in original). When a dispute arose, Soler sued Mitsubishi alleging, among other things, violations of the Sherman Act. Id. at 619-20, 105 S.Ct. 3346. In determining whether the dispute was arbitrable, the Supreme Court stated: [T]he first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute. The court is to make this determination by applying the `federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [FAA].' Id. at 626, 105 S.Ct. 3346 (quoting Moses H. Cone, 460 U.S. at 24, 103 S.Ct. 927). Cape Flattery argues that because Mitsubishi does not suggest any exception to the application of federal arbitrability law, courts should always apply federal arbitrability law to determine the arbitrability of a given dispute. It notes that district courts, including the district court in this case, have suggested, without directly holding, that federal arbitrability law may apply despite an agreement to apply non-federal arbitrability law. See Cape Flattery, 607 F.Supp.2d at 1185 (suggesting that there may be a bright-line rule that the court should apply federal law in determining arbitrability of an agreement governed by ... the FAA regardless of any choice-of-law provision); Chloe Z Fishing Co., Inc. v. Odyssey Re (London) Ltd., 109 F.Supp.2d 1236, 1252 (S.D.Cal. 2000) (holding that for agreements covered by the FAA, the FAA provides an `overriding basis' for why the law under which the case `arises' ... must apply to the question of whether these parties agreed to arbitrate their disputes). Titan does not contest that federal arbitrability law applies generally, but argues that federal arbitrability law requires courts to enforce contracting parties' agreement to apply non-federal arbitrability law. Titan relies primarily on Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). In Volt, the parties agreed to arbitrate any disputes pursuant to the arbitration rules in the California Arbitration Act (CAA). Id. at 470-71, 109 S.Ct. 1248. The question before the Court was whether the FAA preempts the CAA and requires that, in disputes subject to the FAA, federal rules of arbitration apply. Id. at 470-73, 109 S.Ct. 1248. The Court noted that the FAA preempts state laws that render arbitration agreements entirely unenforceable. Id. at 472, 478, 109 S.Ct. 1248 (citing Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)); see also Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996) (FAA preempts state law conditioning enforceability of arbitration clause on compliance with special notice requirements applicable only to arbitration provisions). It held, however, that the FAA does not mandate certain rules of arbitration. There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Volt, 489 U.S. at 476, 109 S.Ct. 1248. Titan argues that just as federal law will enforce an agreement to arbitrate pursuant to non-federal rules of arbitration, federal law should enforce an agreement to determine arbitrability based on non-federal arbitrability law. We agree with Titan that, based on Volt, contracting parties have the power to agree to apply non-federal arbitrability law. The Court stated in Mitsubishi that courts should determine arbitrability by applying the federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. Mitsubishi, 473 U.S. at 626, 105 S.Ct. 3346 (citation and internal quotation marks omitted). But neither party in Mitsubishi argued that anything other than federal arbitrability law applied to the dispute. Thus, although Mitsubishi states that federal arbitrability law applies to disputes under the FAA, it does not address whether federal arbitrability law allows the parties to agree to a non-federal arbitrability law. Volt 's statement that the federal policy is to ensure the enforceability, according to their terms, of private agreements to arbitrate, 489 U.S. at 476, 109 S.Ct. 1248, strongly suggests that courts should respect contracting parties' agreement to be governed by non-federal arbitrability law. Our conclusion is consistent with decisions of our sister circuits. Largely for the reasons just discussed, the Fifth Circuit held that contracting parties could agree to apply Texas arbitrability law in a case governed by the FAA. Ford v. NYL-Care Health Plans of Gulf Coast, Inc., 141 F.3d 243, 248-49 (5th Cir.1998). Several other circuits have applied non-federal arbitrability law in cases governed by the FAA with less detailed discussion. See, e.g., Motorola Credit Corp. v. Uzan, 388 F.3d 39, 50-51 (2d Cir.2004) (applying Swiss arbitrability law); In re Oil Spill By the Amoco Cadiz Off the Coast of France March 16, 1978, 659 F.2d 789, 793 (7th Cir.1981) (applying English arbitrability law). We therefore hold that courts should enforce contracting parties' agreement to have arbitrability governed by non-federal arbitrability law.
The more difficult question is how courts should decide whether the parties have agreed to apply non-federal arbitrability law. The general rule in interpreting arbitration agreements is that courts should apply ordinary state-law principles that govern the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). The general rule would require the court to see whether the parties objectively revealed an intent to apply non-federal arbitrability law. Id. If we were to apply the general rule in this case, it may well be that English law would apply to determine arbitrability. There are, however, some situations concerning the determination of arbitrability in which courts require a higher showing of intent. In Kaplan, the Supreme Court held that courts should be cautious in determining whether the parties have agreed to arbitrate arbitrability. The Court held that [c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so. Id. at 944, 115 S.Ct. 1920 (citation, internal quotation marks and alterations omitted). Under Kaplan, the usual presumption that exists in favor of the arbitrability of merits-based disputes is replaced by a presumption against the arbitrability of arbitrability. Id. The Court reasoned that the question of whether a given merits-based dispute is arbitrable arises when the parties have a contract that provides for arbitration of some issues. In such circumstances, the parties likely gave at least some thought to the scope of arbitration. And, given the law's permissive policies in respect to arbitration, one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. On the other hand, the [question of] who (primarily) should decide arbitrability ... is rather arcane. A party often might not focus upon that question.... And, given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the who should decide arbitrability point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide. Id. at 945, 115 S.Ct. 1920 (internal citations omitted). Courts have taken different approaches to the question of how to determine whether the parties have agreed to apply non-federal arbitrability law. The Fifth Circuit in Ford appears to have applied standard contractual analysis in concluding that Texas arbitrability law applied. It held that the combination of a clause providing that any claim must be settled in accordance with the Texas General Arbitration Act; a bold-typed, all-caps, underlined statement on the first page of the agreement reading, Notice: This Agreement is subject to arbitration under the Texas Arbitration Act; and the fact that the agreement's drafters opposed arbitration all demonstrated that the parties intended Texas law ... to govern the scope of the arbitration clause. Ford, 141 F.3d at 246, 249. The Third Circuit, on the other hand, has held that a general choice-of-law provision is not enough to displace federal arbitrability law. Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 43 & n. 8 (3d Cir.1978). Several district courts have taken the same approach as the Third Circuit. In Chloe Z Fishing Co., 109 F.Supp.2d at 1252-54, the district court concluded that a general choice-of-law provision is insufficient to overcome the overriding basis the FAA creates for applying federal arbitrability law. In Sea Bowld Marine Group, LDC v. Oceanfast Pty., Ltd., 432 F.Supp.2d 1305, 1311-12 (S.D.Fla.2006), the district court held that a general choice-of-law provision was ambiguous concerning whether the parties specified the relevant arbitrability law. It reasoned that the Agreement here contains choice-of-law and arbitration provisions that both reference foreign law. While these designations are relevant to the substantive law to be used, and the location of arbitration, they say nothing, and mean nothing, as to the threshold issue of arbitrability. Id. at 1312. The district court in this case generally followed the reasoning in Sea Bowld. See Cape Flattery, 607 F.Supp.2d at 1185. In concluding that a general choice-of-law provision does not constitute an agreement to apply non-federal arbitrability law, none of these cases specifically relied on Kaplan. However, just as Kaplan was concerned about interpreting a general arbitration agreement to constitute an agreement to arbitrate arbitrability, these courts were concerned about interpreting a general choice-of-law provision to constitute an agreement to apply non-federal arbitrability law. We share these concerns and conclude that our approach to this question should be guided by Kaplan. Like the question of who should decide arbitrability, the question of what law governs arbitrability is rather arcane. In negotiating an agreement, parties are just as unlikely to give thought to the applicable arbitrability law as they are to give thought to the person determining arbitrability. 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 arbitrability law would apply. We therefore conclude, following Kaplan, that courts should apply federal arbitrability law absent clear and unmistakable evidence that the parties agreed to apply non-federal arbitrability law. Kaplan, 514 U.S. at 944, 115 S.Ct. 1920 (citation, quotation marks, and alterations omitted). In this case, there is no clear and unmistakable evidence that the parties agreed to apply English arbitrability law. The arbitration provision states 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. Under 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. See Cape Flattery, 607 F.Supp.2d at 1185. 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 ambiguity, we conclude that federal law applies to determine arbitrability.