The Gateway to Arbitration: Does a Court or an Arbitrator Decide Whether the Parties Have Agreed to Arbitrate a Particular Issue?
Contracts commonly contain arbitration provisions requiring the parties to have a private arbitrator decide their dispute instead of the courts.
But what happens if the parties do not agree that the arbitration provision covers a particular dispute? Who gets to decide this threshold issue of arbitrability? A court or an arbitrator?
Generally, New York courts may decide arbitrability under CPLR 7503, which affords them with the power to compel or stay arbitration. Federal courts are also generally empowered to make this determination under the Federal Arbitration Act. But contracting parties may agree to have arbitrability decided by an arbitrator instead of the courts.
Significantly, parties may not realize they have agreed to assign the arbitrability question to an arbitrator. This assignment can be accomplished by incorporating the applicable rules of an arbitration forum (e.g., the American Arbitration Association) into the governing contract. If the incorporated rules grant the arbitrator authority to determine arbitrability, the parties will be bound by those rules.
In a recent decision, the Appellate Division determined that the contracting parties delegated the gateway arbitrability question to an arbitrator.
The Darelle Revis Lawsuit
In a December 30, 2020 decision, the Second Department analyzed this very issue in Revis v. Schwartz, 192 AD3d 127, 129 (2d Dept. 2020), a case involving a former professional athlete. As detailed below, the court concluded that the parties’ contract required an arbitrator to determine arbitrability.
Darelle Revis played cornerback in the National Football League for over a decade, most famously for the New York Jets. Much to the chagrin of Buffalo Bills’ fans, Revis was well-known for effectively covering the opposing team’s top receiver.
Off the field, Revis has been in a dispute with his former agent, Neil Schwartz. Revis and Schwartz were parties to a NFL Players Association (“NFLPA”) “Standard Representation Agreement” (the “SRA”). Revis brought a lawsuit alleging Schwartz committed fraud, breached his contract with Revis, and was unjustly enriched by receiving commissions paid after Schwartz took fraudulent actions.
In the lawsuit, Schwartz “moved to compel arbitration of the matter and to stay all proceedings in the action pending arbitration” based on provisions in both the SRA and the NFLPA regulations. The SRA incorporated the NFLPA regulations by reference and defined them to be part of the SRA.
Unsurprisingly, Revis argued that the claims in the lawsuit were separate from those covered by the SRA and thus not subject to arbitration. Siding with Schwartz, the Second Department determined that Revis and Schwartz “agreed to arbitrate gateway questions of arbitrability” and thus no court had “the authority to decide whether and to what extent these parties’ disputes [were] arbitrable.”
The Second Department reached this decision by analyzing the governing documents which incorporated the “Voluntary Labor Arbitration Rules of the American Arbitration Association.” Under those AAA rules, the arbitrator had “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.”
After examining these provisions, the court found the incorporation of the AAA rules was “clear and unmistakable” evidence that the parties agreed to allow an arbitrator to determine the threshold question of arbitrability. In its analysis, the court observed New York precedent (and similar federal court holdings) which “enforced the rules of a particular arbitral forum where those rules were incorporated into the parties’ agreement.”
The court ultimately ruled it was not permitted to determine whether Revis’ causes of action fell within the scope of the arbitration clause at issue and it would “be error” to make such an inquiry.
The Arbitrability Question in Other Contexts
Of course, arbitration clauses do not only affect professional athletes. Arbitration provisions are commonly used in agreements, including commercial and employment contracts.
Recently, the Fourth Department issued a similar ruling in an action brought under the New York Labor Law alleging unlawful retention of gratuities. The Court held that the parties’ agreement, which was governed by the Federal Arbitration Act, required the arbitrator to decide whether the claims were required to be brought in arbitration rather than in court. See Basile v. Riley, 188 AD3d 1607 (4th Dept. 2020). The court found the arbitration agreement at issue “demonstrated a clear intent by the parties to arbitrate gateway questions of arbitrability.”
“Arbitration is a matter of contract grounded in agreement of the parties.” Belzberg v. Verus Investments Holdings Inc., 21 NY3d 626, 630 (2013). As the Supreme Court recently observed “the question of who decides arbitrability is itself a question of contract.” Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 527 (2019).
Before agreeing to an arbitration provision, it is important to understand its scope and implications. If a party does not wish to afford broad authority on the arbitrator, it may negotiate the particular issues it wishes the provision to cover, including who has the authority to determine the threshold arbitrability question.
Rob Yawman is an Associate Attorney at Adams Leclair. Rob’s practice focuses on business litigation, commercial landlord and tenant disputes, and defense against employment discrimination claims.