Liz has written before about the ways that state courts sometimes try to resist SCOTUS’s love affair with arbitration. Resistance can come in many and varying forms, some more subtle than others.
One persistent source of confusion in arbitration law, and thus a locus for resistance, centers on delegation clauses. As a quick refresher, in the United States, courts decide questions of arbitrability (questions about the proper scope of an arbitration agreement as well as the contractual validity of an arbitration agreement) unless the parties, in clear and unmistakable language, delegate these questions to the arbitrator. Parties may provide such a delegation, most courts agree, by including express language in the arbitration clause to this effect or by incorporating by reference a set of arbitration rules that include such a delegation. (See, e.g., Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1074 (9th Cir. 2013) (“Virtually every circuit to have considered the issue has determined that incorporation of [institutional] arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.” But for a different take, check out this blast from ArbitrationNation’s past.)
Like the doctrine of separability, the goal of a delegation clause is to insulate and protect the arbitral process, preventing the parties from having to waste time and money fighting in court before getting to arbitration.
In Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates, (Wis. 2018), however, the Wisconsin Supreme Court effectively created a new rule that allows a court to ignore a delegation clause. As the dissenting Justice says, the case “creat[es] a new rule bestowing on the judiciary the power to decide arbitrability even though the parties agreed an arbitrator would resolve this issue.” Accordingly, parties who choose arbitration in Wisconsin, may wind up stuck waging preliminary battles about arbitrability in courts, even if they include clear and unmistakable language saying that they want all of their fights resolved before an arbitrator.
The case involved a potential conflict between two contracts. The first was an Operating Agreement, which contained an arbitration clause and a choice to arbitrate pursuant to the JAMS Arbitration Rules (which include a delegation provision). The Operating Agreement substantively contained a set of non-compete obligations preventing certain behavior by the defendants. The second, and subsequent, contract was a Redemption Agreement, which did not contain any reference to arbitration, included a merger clause, and was intended to at least partially supersede the earlier agreement. Specifically, the Redemption Agreement was supposed to release the defendants from their obligations under the Operating Agreement.
The defendants started acting in contravention to their non-compete obligations. The plaintiffs objected, saying that they had never actually agreed to the Redemption Agreement. Instead, they believed it to be a mere proposal that they had ultimately rejected.
The Wisconsin Supreme Court concluded that the questions of whether the Redemption Agreement was valid and, if so, whether it changed the forum for dispute resolution were for the court rather than the arbitrator. In reaching this conclusion, the majority effectively ignored the delegation clause, relegating it to an aside in a footnote.
Lest you think that I’m being too harsh in saying that the decision evidences resistance to arbitration, I’ll just quote Justice Rebecca Bradely’s dissent in closing:
While the foundation of the majority’s preference for court resolution of arbitrability disputes is unclear, its disdain for arbitration as a method of dispute resolution is transparent . . . The majority misunderstands that the choice of method for dispute resolution belongs to the parties, not the court.