Karen Chesley of Boies Schiller Flexner.

Suppose that in 1980, two parties entered into a contract to buy cassette tapes with an arbitration clause incorporating the American Arbitration Association (AAA) rules for disputes related to that contract.

The parties eventually terminate the cassette contract and create a new contract to purchase computers that does not require arbitration. Years later, a dispute over the sale of those computers arises, and the defendant seeks to compel arbitration under the defunct 1980 agreement.

Who determines whether the dispute is arbitrable? A circuit split leaves the answer unclear, meaning contracts must clearly identify whether a judge or arbitrator decides arbitrability or risk uncertain results.

The long-standing rule is that courts—not arbitrators—determine if a dispute is arbitrable unless the parties “clearly and unmistakably” delegate that decision to arbitrators.
Courts have limited this rule in recent years, however, by finding that incorporating AAA and JAMS rules demonstrates “clear and unmistakable” agreement to delegate questions of arbitrability to arbitrators. And in Rent-A-Center v. Jackson, the U.S. Supreme Court held that delegation provisions apply to “gateway questions of arbitrability,” including whether an “agreement covers a particular controversy.”

Absent some limiting principle, these rules can lead to absurd results because executing a contract with an implied delegation clause would empower arbitrators to determine the arbitrability of every dispute between the parties, no matter how attenuated from the original contract.

To prevent this absurdity, the U.S. courts of appeal for the Fifth, Sixth and Federal circuits have adopted the “wholly groundless” test, which requires that a court send questions of arbitrability to arbitrators only if there is a “plausible” pro-arbitration argument.

Applying this test in Douglas v. Regions Bank in 2014, the Fifth Circuit denied arbitration of the plaintiff's claim that a bank negligently allowed her attorney to embezzle funds from a trust account based on an arbitration clause she signed when opening her own checking account with the same bank.

The court explained that merely agreeing to delegate arbitrability in one contract does not mean the plaintiff intended “to bind herself for life to gateway arbitration for any and all claims that ever might exist between” the parties. Similarly, on June 5, the Federal Circuit applied Fourth Circuit law in Evans v. Building Materials to find arbitration “wholly groundless” because the lawsuit challenged actions “plainly outside the arbitration provision.”

In contrast, the Tenth Circuit rejected the “wholly groundless” test outright in Belnap v. Iasis Healthcare, holding that a case must automatically go to arbitration if any contract between the parties contains a delegation clause.

The court explained that once incorporation of the JAMS rules has shown the intent to have arbitrators decide arbitrability, a court “must compel the arbitration of arbitrability issues in all instances.” The court predicted that other circuits would likewise refuse to apply the “wholly groundless” test—and on Aug. 7, the Eleventh Circuit did just that in Jones v. Waffle House, finding that “the wholly groundless exception is in tension with the Supreme Court's arbitration decisions” and thus should have “no place in” a court's analysis.

Given the uncertainty created by this circuit split, parties drafting arbitration clauses should affirmatively select who decides questions of arbitrability.

In choosing who is best suited to this task, it is worth remembering that fee arrangements typically give arbitrators a strong financial incentive to find a dispute arbitrable. Thus, to ensure that only those disputes the parties agreed to arbitrate are sent to arbitration, contract drafters should include an “anti-delegation” provision that clearly states a court must decide all disputes regarding the scope and applicability of an arbitration clause.

Karen Chesley is a partner at Boies Schiller Flexner specializing in high-stakes commercial litigation.