The Antecedent Delegation Agreement: “Russian Doll Questions” Concerning a Non-Signatory to an Arbitration Agreement Remain Unresolved
Recently, the U.S. Supreme Court denied certiorari in Piersing v. Domino’s Pizza Franchising LLC, 20-695 (Jan. 25 2021) and dismissed its own writ of certiorari as “improvidently granted” in Henry Schein, Inc. v. Archer & White Sales, Inc., 592 U.S. ___ (Jan. 25 2021). Both cases concerned a non-signatory of an arbitration agreement seeking to enforce the terms of that agreement against a signatory, including terms that arguably concerned whether arbitrability issues were delegated to an arbitrator for adjudication in the first instance. And both arguably offered true threshold questions in that regard – e.g., who decides the delegation issue itself. Here were opportunities to wrestle with the perplexing Russian (nesting) doll problem.
We can only speculate about why SCOTUS passed on these cases. True, they were not ideal vehicles for presenting several of the issues that might have been addressed, and yet we might lament the missed opportunities.
SCOTUS has held that parties may agree to delegate the adjudication of arbitrability issues in the first instance to an arbitrator, rather than a court (the presumptive adjudicator of such issues), and that a court must enforce that “antecedent agreement” to delegate, see Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529, 2019 U.S. LEXIS 566 (Jan. 8, 2019), when there is a clear and unmistakable manifestation of consent to it, see Rent-Center v. Jackson, 561 U.S. 63, 69 (2010); First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
And SCOTUS previously indicated that a non-signatory may enforce an agreement to arbitrate against a signatory based on an equitable estoppel theory. E.g., cf. GE Energy Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020) (regarding arbitration clause subject to New York Convention as well as FAA).
However, SCOTUS has not squarely addressed several issues concerning the antecedent delegation agreement; e.g., (a) who in the first instance should decide whether there is an antecedent agreement to delegate arbitrability issues; (b) who should do so when one of the parties litigating the delegation issue is not a signatory to the relevant arbitration agreement; and indeed (c) whether a non-signatory to an arbitration agreement can enforce a purported antecedent delegation agreement between other parties.
In the Piersing case, he (and Blanton) had commenced a class action suit against Domino’s, contending that its franchise agreement, which required franchisees not to solicit or hire employees from other franchisees without the prior consent of the earlier franchisee-employer, violated federal anti-trust and state employment laws. See Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 2020 U.S. App LEXIS 18975 (6th Cir. June 17. 2020). Piersing had been employed simultaneously by two Domino’s franchisees, and he had signed an agreement with a least one of them that required him to arbitrate issues related to his employment by that employer. Any such arbitration was to be conducted under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”). 2020 U.S. App. LEXIS 18975 at *2-*3. Those rules authorize the arbitrator to determine his/her jurisdiction. Domino’s was not a signatory of the relevant arbitration agreement, but nonetheless moved to compel arbitration under the Federal Arbitration Act (“FAA”). The District Court granted that motion. See Blanton v. Domino’s Pizza Franchising LLC, 2019 U.S. Dist. LEXIS 184817 (E.D. Mich. Oct. 25, 2019).
On appeal, the issue was whether the arbitrability question had been delegated to an arbitrator in the first instance. That included the question of whether the incorporation by reference of the AAA Rules in the pertinent arbitration agreement was a clear and unmistakable manifestation of Piersing’s agreement to arbitrate “arbitrability”. 2020 U.S. App. LEXIS 18975 at *5. The Sixth Circuit held that it was.
The Court of Appeals’ holding was based on the following: (1) the AAA rules in question “clearly empower an arbitrator to decide questions of ‘arbitrability’;” (2) parties can incorporate outside documents into their contract by agreement; (3) SCOTUS has nearly (but not quite) held that incorporation by reference of AAA arbitration rules or the like, which authorize an arbitrator to adjudicate his/her own jurisdiction, is indeed a clear and unmistakable manifestation of an intent to delegate questions of arbitrability to an arbitrator in the first instance; (4) Sixth Circuit precedent supports its holding; and (5) “every one of our sister circuits to address the question … has found that incorporation of the AAA Rules … provides ‘clear and unmistakable’ evidence that the parties agreed to arbitrate ‘arbitrability.’” See 2020 U.S. App. LEXIS 18975 at *5-*7. Thus, the Sixth Circuit held that Piersing had agreed to arbitrate issues of arbitrability.
But the Court of Appeals admittedly did not address another relevant issue. Assuming arguendo that Piersing had made a delegation agreement (in the pertinent arbitration agreement) with his franchisee counterparty, he clearly had not made one with Domino’s. So, did Domino’s have legal grounds to enforce against Piersing an antecedent delegation agreement that Piersing had not made with Domino’s? (Moreover, who decides that?)
The Court of Appeals noted that it was skipping over the issue. See id. at *6n.1. It pointed out that while the litigants apparently viewed the sole issue to be whether Piersing agreed to arbitrate whether non-signatory Domino’s “has any right to enforce the arbitration agreement as a whole,” there was an antecedent issue — “namely, whether Domino’s [a non-signatory] has any right to enforce the specific provision of the agreement in which Piersing purportedly agreed to arbitrate ‘arbitrability’.” The court expressed no view on that distinct issue because it had not been placed before it. See id. Nor did it consider the question of who decides that gateway issue.
As concerned the Piersing case, SCOTUS did not take up a Circuit Court decision that incorporation by reference of AAA arbitration rules amounted to a clear and unmistakable manifestation of an intention by the parties to an arbitration agreement to delegate threshold arbitrability questions to an arbitrator in the first instance, and that a non-signatory to the agreement in question could enforce the antecedent delegation agreement in the pertinent arbitration clause against a resisting signatory of that agreement. In Henry Schein, SCOTUS did not take up a Court of Appeals decision that incorporation by reference of AAA arbitration rules did not clearly and unmistakably evidence such consent regarding certain types of claims when those types of claims are the subject of a carve out in the relevant arbitration clause. The Courts of Appeals seem consistently to consider the unambiguous incorporation of competence-competence arbitration rules in an arbitration clause as a sufficient manifestation of consent by the contracting parties to delegation of arbitrability issues.1 Unless SCOTUS wants to teach otherwise, it has little reason to grant certiorari on that issue.
However, both Piersing and Schein involved a non-signatory seeking to enforce an alleged delegation agreement against a signatory of the arbitration agreement in question. Neither neatly teed up the question of whether a non-signatory to an alleged antecedent delegation agreement could enforce such terms against a resisting signatory of the arbitration agreement in question. Nor did either tee up the logical preceding question of who decides that issue. But these questions will reach SCOTUS in manageable form eventually.
How to address them? A purported delegation agreement would be an antecedent arbitration agreement within a broader arbitration agreement within a broader contract. In the case of a non-signatory seeking to compel a contract signatory to arbitrate arbitrability, the making of the antecedent delegation agreement is arguably in issue from the first. Must or should a court take this up as a contract formation question? If a court retains the principal authority, under FAA §4, to decide questions regarding “whether the parties mutually assented to a contract containing or incorporating a delegation provision,” MZM Construction Co. v. New Jersey Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. 2020), then it may have to determine from an independent source – i.e., outside the agreement whose formation or existence is being disputed – whether the contesting parties (a signatory and a non-signatory of a written contract) agreed to arbitrate the antecedent agreement concerning delegation.
From another perspective, the equitable estoppel doctrine has been deemed a basis to enable a non-party to an arbitration agreement to compel a signatory of that agreement to arbitrate provided that the subject matter of the substantive dispute between the non-signatory and the signatory was “intertwined with the contract providing for arbitration.” Superficially, the equitable estoppel argument might have appeal concerning the delegation issue in the Piersing case, but one wonders about its ultimate viability there or in the Henry Schein case, both of which concerned substantive claims for violations of antitrust and other codified laws, not for breaches of the contracts containing the arbitration clauses. See also, Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. Jan. 20, 2021).
Questions, questions. SCOTUS will have work to do when the time comes to address them.
1 Notably, the Sixth Circuit distinguished the situation in which class arbitrability was in question – another instance in which non-signatories of an arbitration agreement seek to compel a signatory to arbitrate – acknowledging that the incorporation of the AAA Rules might not constitute clear and unmistakable evidence that parties agreed to arbitrate whether to allow class-wide arbitration because (i) SCOTUS has distinguished the notion of “class arbitration” from conventional bilateral arbitration and (ii) “nothing in the AAA Rules expressly empowers arbitrators to decide this issue.” See 2020 U.S. App. LEXIS 18975 at *18-*19.