Arbitrability Basics: An Illustration of the “Autonomy” Principle
Arbitration is a creature of contract. So is the law concerning contracts with an arbitration clause the same as the law concerning any other contract? Almost. One must always bear in mind the “separability” or “independence” of the arbitration agreement -- the autonomy principle.
For example, should a plaintiff be compelled to arbitrate a dispute if the contract containing the ADR clause has expired? What if the contract containing the arbitration clause is unconscionable as a matter of public policy? A plaintiff may nonetheless be compelled to arbitrate in order to resolve his dispute, as illustrated recently in a decision by the U.S. District Court for the Northern District of Texas. And that court also provided a helpful reminder regarding the crucial question of who decides such issues. But the Court took a while before arriving at the critical points.
In Athas Health, LLC v. Giuffre, No. 3:17-CV-300-L-BN (N.D. Tex. Feb. 23, 2018), an aggrieved surgery patient initiated a lawsuit in New Jersey state court against several parties, including Athas Health. Athas in turn removed the case to the federal court for the District of New Jersey, and then moved to stay that case, while also commencing a proceeding in the Northern District of Texas, seeking to compel arbitration (see 9 U.S.C. § 4) in accordance with an arbitration clause in a Financial Agreement between the parties.
In Texas, defendant Giuffre moved to dismiss the petition to compel arbitration (which the Court took to be defendant’s opposition to the plaintiff’s petition), contending that the contract containing the operative arbitration clause had expired before the application was made to compel arbitration, and therefore the agreement to arbitrate was unenforceable. Giuffre cited the contract in question, which was dated February 19, 2014 and stated that “[t]his Authorization will expire one year from the date of patient’s signature.” (Defendant also argued -- albeit only in his reply submission on his purported dismissal motion -- that the arbitration clause was unenforceable because the parties’ contract was unconscionable.) In response, Athas argued that the quoted language related only to the permissible use of Giuffre’s medical records, and not to the medical procedure at issue. Athas also contended that the medical procedure at issue had occurred on February 21, 2014, thus prior to the alleged termination date, and so the contract’s arbitration provision should still be enforced.
A Magistrate Judge recommended in his Findings, Conclusions and Recommendation (the “Recommendation”) -- and the District Court confirmed -- that the agreement to arbitrate was valid and enforceable. The Magistrate and the Court largely relied on a 1991 Supreme Court decision holding that there is a “presumption in favor of post-expiration arbitration of matters unless ‘negated expressly or by clear implication.’” Litton Fin. Printing Div. v. NLRB, 501 U.S. 190, 204 (1991).
According to the Supreme Court, a two-part test determines whether or not a post-expiration dispute may be arbitrated. First, a post-expiration grievance must involve (1) facts and circumstances that occurred before expiration; or (2) conduct occurring after expiration that infringes on a right that accrued under the agreement; or (3) instances in which, under normal principles of contract interpretation, the disputed right survives expiration of the remainder of the agreement. Id. at 205-206. Second, a post-expiration grievance must not be subject to any legal restraint that is extrinsic to the agreement, such as fraud, unconscionability or duress. Applying this analytical framework, the Magistrate found that the arbitration agreement was enforceable because the dispute at issue arose from facts and circumstances (i.e., a surgical procedure) that occurred before the expiration of the parties’ contract. Furthermore, since Giuffre had not raised unconscionability until his reply brief, the Magistrate precluded him from relying on an unconscionability argument to defeat arbitrability.
The District Court affirmed most of the Magistrate’s recommendations, deviating only to address Giuffre’s belated argument regarding unconscionability. The Court indicated that even if it were to consider the unconscionability argument, it nevertheless would have concluded that the arbitration clause was enforceable because, “as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.” Id. quoting Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010). Thus, a party’s challenge to another provision of the contract in question, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate. Ultimately, regardless of whether a contract is voidable, the validity and enforceability of the arbitration clause is a separate issue to be separately determined. Id.
But there was more. The Court reminded that challenges to the validity and enforceability of a contract as a whole are to be determined by an arbitrator in the circumstances presented, not a court. “It is only when the challenge is to the arbitration clause itself that the court, rather than an arbitrator, decides whether the arbitration agreement, as distinct from the contract in which it appears, is valid, irrevocable, or enforceable.” Id. (internal citations omitted). Because Giuffre’s two arguments regarding enforceability were addressed to the entire contract, not just the arbitration provision, the dispute had to be referred to arbitration in any case. See, Buckey Check Cashing, 546 U.S. at 444-45.
Ultimately, the Court opined that because defendant Giuffre had not challenged the arbitration provision itself, the Court must treat it as valid under FAA § 2 and enforce it under FAA §§ 3 and 4. Giuffre’s challenge to the validity of the Financial Agreement as a whole was an issue for the arbitrator. So too, any residual issues regarding the scope of the arbitration clause were for the arbitrator to decide.
Finally, because the Court thus granted the petition that was before it, and all of Giuffre’s claims (which were not before the Texas court) were subject to arbitration, the Court chose to dismiss the proceeding before it with prejudice. The Court saw no reason to retain jurisdiction over the proceeding before it considering that post-arbitration remedies “are limited to judicial review based on the grounds set forth in the FAA.” Moreover, the Court noted, neither party had proffered reasons to justify the Court’s retention of jurisdiction of the matter. (We note that the practice elsewhere in similar circumstances is different. But that is a post for another day.)
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