Opinion ID: 4565238
Heading Depth: 3
Heading Rank: 3

Heading: The Contractual Delegation of Powers to

Text: Arbitrators In Sandvik, we also noted that, under Supreme Court precedent, contracting parties are free to refer arbitrability questions to arbitration, including “disputes of the nature before us today[.]” Id. 111. In other words, parties may contractually bestow upon arbitrators the power to decide their own jurisdiction, id., a well-established arbitration principle known as competence-competence or arbitrating arbitrability.9 8 In Par-Knit, we held that the party opposing arbitration could not be bound by an arbitration provision before the court determined if the signatory had authority to bind the company to the container contract, but we did not address the implications of the severability doctrine. 636 F.2d at 54-55. 9 The concept of “arbitrability” encompasses all sorts of “gateway” issues regarding the parties’ obligation to arbitrate, “such as whether the parties have agreed to arbitrate or whether their [arbitration] agreement covers a particular controversy.” Henry Schein, 139 S. Ct. 524, 529 (2019) (citation omitted); see also Singh v. Uber Techs. Inc., 939 F.3d 210, 215 (3d Cir. 2019) (“To the extent that a particular ground implicates the threshold question of whether the parties are bound by an agreement to arbitrate, it is referred to as a gateway question of arbitrability.” (emphasis added)). 16 See China Minmetals Materials Imp. & Exp. Co. v. Chi Mei Corp., 334 F.3d 274, 281, 287 (3d Cir. 2003); see also Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 849-50 (6th Cir. 2020). We also emphasized the Supreme Court’s admonition that courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clea[r] and unmistakabl[e] evidence that they did so.” Sandvik, 220 F.3d at 111 (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)) (alterations supplied); see also AT & T Techs., Inc. v. Commc’ns Workers, 475 U.S. 643, 649 (1986) (“Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.”). Since our decision in Sandvik, the Supreme Court has further addressed the procedures for determining who decides “gateway questions of arbitrability.” Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010) (internal quotation marks and citation omitted). In Rent-A-Center, the Court recognized that contracting parties can agree that arbitrators, not courts, shall resolve arbitrability issues by including in the contract a so-called “delegation provision” conferring upon the arbitrators the “exclusive authority” to decide those gateway matters. 561 U.S. at 68-69, 71. The Court held that, under the FAA, a delegation provision is itself “an additional, antecedent [arbitration] agreement.” Id. at 70. Think of a delegation provision as a mini-arbitration agreement within a broader arbitration agreement within a broader contract, “something akin to Russian nesting dolls.” Id. at 85 (Stevens, J., dissenting); see 1 Domke on Com. Arb. § 15:11.50 (“The goal of delegation is to insulate and protect the arbitration process, 17 preventing the parties from wasting time and money fighting in court before going to arbitration.”). The Rent-A-Center Court explained that the FAA operates on the delegation provision as it does on any other arbitration agreement. 561 U.S. at 70. Thus, consistent with the severability doctrine, unless the party opposing arbitration challenges “the delegation provision specifically,” the district court “must treat it as valid” and “must enforce it” by sending “any challenge to the validity” of the underlying arbitration agreement to the arbitrator. Id. at 72. Even when the grounds for invalidating the delegation provision and the underlying agreement are the same, the arbitrability challenge must still be directed at the delegation provision specifically to invoke a court’s power to intervene. Id. at 71. The Court thus concluded that, because the party opposing arbitration failed to direct its unconscionability challenge at the delegation provision, it was for the arbitrator to resolve that gateway issue. Id. at 72 (observing that “[n]owhere in his opposition” in the district court “did [the plaintiff] even mention the delegation provision”); see MacDonald v. CashCall, Inc., 883 F.3d 220, 227 (3d Cir. 2018) (“[W]ithout a specific challenge to a delegation provision, the court must treat that provision as valid and enforce it according to FAA § 4[.]”). 4. Application to this Case: The Intersection Between the Severability Doctrine and the Delegation of Contract Formation Disputes So, what happens when, as here, the container contract, whose formation or existence is being challenged, has a delegation provision empowering the arbitrator to decide 18 whether an agreement exists? Who decides the threshold issue then? The Funds point out that MZM attacked the validity of the SFA and CBA (the container contract) and the CBA’s arbitration provision (the broader arbitration agreement) but failed to direct its challenge specifically at the delegation provision (the agreement to arbitrate arbitrability). According to the Funds, absent any allegation that the delegation provision itself is invalid as required under Rent-A-Center and MacDonald, the District Court was obligated to enforce it—no questions asked. That argument has some appeal. After all, Perry admits that she intended to enter into some sort of agreement with the union when she signed the SFA, which expressly incorporates the 2002 CBA “in full.” JA64. And MZM does not argue that the terms of the SFA alone are ineffective for incorporating the CBAs. Thus, on the face of these documents, the delegation provision seems to be a valid agreement to arbitrate the existence of the CBA. Without any allegation or argument indicating why the delegation provision itself is defective, the court is left to connect the dots on its own, something that Rent- A-Center seems to forbid. See Restatement (Third) of the U.S. Law of Int’l Comm. Arb. § 2-12 & com. c (Tentative Draft No. 4, 2015) (“[T]here may be circumstances in which, pursuant to the separability doctrine, a court finds that an arbitration agreement came into existence even though the contract in which it is found may not have.”); George A. Bermann, The Supreme Court Trilogy and Its Impact on U.S. Arbitration Law, 22 Am. Rev. Int’l Arb. 551, 557-58 (2011) (“[E]ven a party that steadfastly insists that it is a stranger to an agreement may, by virtue of clear and unmistakable language in the 19 contract, find itself having given a tribunal primary authority to answer that very question.”). MZM sees things differently. It believes that Rent-A- Center and MacDonald apply only when a party challenges the validity or enforceability of an existing agreement, not when, as here, the formation or existence of the entire agreement is in issue. Reduced to its essence, the parties’ dispute sits at the intersection of the severability doctrine as articulated in Rent- A-Center, which requires that an unchallenged delegation provision in a disputed contract be enforced as presumptively valid, and section 4 of the FAA, which, as construed in Sandvik, 220 F.3d at 109, “affirmatively requires” a court to rule on the formation of the container contract. Although the Third Circuit has not since Rent-A-Center squarely addressed this issue, we believe that our decision in Sandvik compels the same outcome here. Recall that, in Sandvik, we expressly rejected the argument that the severability doctrine applies when the threshold arbitrability issue is whether the parties mutually assented to the container contract. 220 F.3d at 101, 106, 108. For good reason: Lack of assent to the container contract necessarily implicates the status of the arbitration agreement, when the container contract and the arbitration provision depend on the same act for their legal effect. Id. at 109, 111. It is thus inevitable that a court will need to decide questions about the parties’ mutual assent to the container contract to satisfy itself that an arbitration agreement exists and vice versa. That is no less true when the container contract includes or incorporates a delegation provision. See China Minmetals, 334 F.3d at 288 (“[A] contract cannot give an arbitral body any power, much less the 20 power to determine its own jurisdiction, if the parties never entered into it.”). Given that Rent-A-Center made clear that the FAA operates on the delegation provision as it does on any other arbitration agreement, we see no reason to deviate from our analysis in Sandvik, and we conclude that the degree of specificity required in Rent-A-Center does not apply here.10 We find further support for this view in the Supreme Court’s arbitrability jurisprudence. In Rent-A-Center itself, the Court drew a distinction between, on the one hand, questions about the validity or enforceability of an arbitration provision in an existing contract and, on the other hand, questions about whether an agreement “was ever concluded” in the first place. 561 U.S. at 70 n.2 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1 (2006)). The Court emphasized that it was only addressing the former, id., perhaps implying that its decision did not apply to the latter. In Granite Rock, the Court again suggested that questions about contract formation are different, and listed arbitrability issues that a “court must resolve” before referring a matter to arbitration, which “always include whether the [arbitration] clause was agreed to.” 561 U.S. at 297 (emphases added); see also Henry 10 We note that MZM directed its fraud in the execution challenge at the SFA incorporating the CBAs and, on that basis, disputed any agreement to arbitrate under the CBA’s arbitration provision. It never mentioned the “delegation provision” specifically by name or even cited the relevant subpart. Though this was enough to put the Funds on notice that MZM was challenging the formation or existence of any arbitration agreement predicated on the execution of the SFA, we think it prudent for parties to always be as precise as possible when stating their claim to avoid any pitfalls. 21 Schein, 139 S. Ct. at 530 (“[B]efore referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”). To be sure, none of those cases, or any other Supreme Court case for that matter, dealt with a contract-formation dispute involving a delegation provision assigning that task to the arbitrator, so this precise situation remains an open question. While in this Court we are bound by Sandvik, we do not follow it blindly. Whether and how Sandvik applies here is a thorny issue post-Rent-A-Center, and one that could reasonably go either way depending on how one weighs the FAA’s competing policies. No matter how this question is resolved, there is a risk that one of the parties will be denied the full benefit of its bargain or the forum to which it is entitled. If the court were allowed to intervene at the outset and ultimately conclude that a validly formed agreement exists, the Funds will have been theoretically denied the contractual right to have that issue resolved by the arbitrator in the first instance and will have been subjected to litigation inconveniences that they were seeking to avoid by bargaining for a delegation provision. Inversely, if the court enforces the delegation provision without first considering the existence of the container contract, and the arbitrator later concludes that no agreement ever existed, then MZM will have been compelled to arbitrate a matter it never agreed to and will have been denied a judicial forum in the process. We weighed those concerns in Sandvik, 220 F.3d at 111, and we weigh them today in light of Rent-A-Center and its progeny. Consistent with the Supreme Court’s repeated admonition that, at its core, “arbitration is a matter of contract,” 22 Rent-A-Center, 561 U.S. at 67, 69, we believe that the text of section 4 of the FAA—mandating that the court be “satisfied” that an arbitration agreement exists—tilts the scale in favor of a judicial forum when a party rightfully resists arbitration on grounds that it never agreed to arbitrate at all. Indeed, it can hardly be said that contracting parties clearly and unmistakably agreed to have an arbitrator decide the existence of an arbitration agreement when one of the parties has put the existence of that very agreement in dispute. See Rent-A- Center, 561 U.S. at 69 n.1 (noting that the “‘clear and unmistakable’ requirement . . . pertains to the parties’ manifestation of intent”) (citation omitted)). We are not alone in reaching this conclusion. After Rent-A-Center, several sister circuits have confronted this same threshold question and have declined to enforce delegation provisions when the formation or existence of the container contract was at issue. See In re: Auto. Parts Antitrust Litig., 951 F.3d 377, 385-86 (6th Cir. 2020); Berkeley Cty. Sch. Dist. v. Hub Int’l Ltd., 944 F.3d 225, 234 (4th Cir. 2019); Lloyd’s Syndicate 457 v. FloaTEC, L.L.C., 921 F.3d 508, 515 (5th Cir. 2019); Nebraska Mach. Co. v. Cargotec Sols., LLC, 762 F.3d 737, 741 & n.2 (8th Cir. 2014).11 We join these circuits in adopting the view that, under section 4 of the FAA, courts retain the primary power to decide questions of whether the parties mutually assented to a contract containing or incorporating a delegation provision. 11 District courts in the Seventh Circuit have adopted this position as well. See, e.g., CCC Info. Servs. Inc. v. Tractable Inc., No. 18 C 7246, 2019 WL 2011092, at  (N.D. Ill. May 7, 2019), appeal pending, No. 19-1997 (7th Cir.). 23 We conclude our analysis of this threshold question by echoing Sandvik’s disclaimer that nothing in our decision today precludes parties from delegating issues of contract formation like the one before us. 220 F.3d at 111. But we caution that the legal effect of the delegation must come from an “independent source” outside the contract whose formation or existence is being disputed. Id. at 108. For instance, parties can enter into pre-negotiation contracts in which they agree to arbitrate all arbitrability issues pertaining to future contracts between them. See id. at 111-12. Or, once a dispute has arisen, they can agree by stipulation to submit their entire dispute to arbitration, including any gateway issues regarding the formation of the original contract containing the delegation provision. See Restatement (Third) of the U.S. Law of Int’l Comm. Arb. § 2-12(b) & com. d (Tentative Draft No. 4, 2015). Even then, the arbitrators’ determination as to whether the parties agreed to arbitrate in the first place will be reviewable de novo by a court of competent jurisdiction on the backend if the arbitrators render an award in the absence of a validly existing arbitration agreement over a party’s objection. China Minmetals, 334 F.3d at 288-89. In brief, we reaffirm our decision in Sandvik and hold that, unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue, those gateway questions are for the courts to decide.