Third Circuit Enforces Delegation Provision in Arbitration Agreement
A “delegation provision” in an arbitration agreement authorizes the arbitrator to decide issues concerning the arbitrator’s own jurisdiction over disputes before him or her. Absent a delegation provision, such jurisdictional issues are for courts to decide when adjudicating motions to compel arbitration. In its recent decision in Carrone v. United Health Care Group Inc., the United States Court of Appeals for the Third Circuit clarified the circumstances under which courts may entertain challenges to arbitration agreements with delegation provisions.
Background
Michele Carrone filed suit in federal district court in New Jersey charging her employer and coworkers with discrimination. The defendants moved to compel arbitration. The parties’ arbitration agreement incorporated by reference the Employment Dispute Resolution Rules of the American Arbitration Association (AAA). Rule 6(a) of those rules sets forth a “delegation” provision, to wit: “The arbitrator shall have 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”; and, further: “The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part.” Carrone opposed the motion to compel arbitration on the grounds that “(1) the arbitration agreement’s amendment provision rendered the agreement illusory, (2) the arbitration agreement as a whole was illusory, and (3) the arbitration agreement was unconscionable.” The district court granted the motion to compel without deciding any of these issues, and Carrone appealed.
The Third Circuit’s Opinion
The Third Circuit began its analysis recognizing the general rule that arguments that the parties did not make a binding agreement to arbitrate, such as the arguments advanced by Carrone, are not for the arbitrator but for the court to address, applying state law principles of contract formation. The parties, however, may delegate questions of arbitrability to the arbitrator. In other words, parties are free to grant arbitrators the power to decide their own jurisdiction. The court explained that “when an arbitration agreement provision delegates arbitrability issues to the arbitrator, that provision ‘is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce,’ and…a delegation provision [operates] as a mini-arbitration agreement within a broader arbitration agreement.”
Given the presence of a delegation provision in the arbitration agreement at issue in the case before it, the Third Circuit identified two ways in which Carrone could have avoided arbitration. First, she could have challenged the validity of the delegation provision specifically. Because she made no such challenge in the district court, however, she was precluded from making that challenge on appeal. (A prior Third Circuit opinion precluded Carrone from attacking the delegation provision on the grounds that the arbitration agreement’s incorporation by reference of the AAA’s arbitration rules was ineffective. New Jersey law allows unsigned documents to be incorporated by reference when the party to be bound has knowledge of and assents to the incorporated terms and when the incorporated document is described in such terms that its identity may be ascertained beyond doubt.)
Second, Carrone could have argued the arbitration agreement lacked mutual assent, i.e., she never agreed to arbitration. In its prior opinion noted above, the Third Circuit had held that, despite the presence of a delegation provision, challenges to arbitration agreements based on lack of mutual assent are to be decided by the court. Here again, however, the court concluded that Carrone had failed make the necessary challenge in the district court. The appellate court recognized that in the district court, Carrone had argued that the arbitration agreement lacked mutuality because it was “illusory,” given that it lacked consideration. But, applying New Jersey law, the Third Circuit concluded that lack of consideration is not the same as lack of mutual assent. Mutual assent simply “requires that the parties have an understanding of the terms to which they have agreed…Just as parties can assent to a promise that lacks consideration, they can assent to a promise that is illusory.” Because Carrone never made a mutual assent argument – i.e., because she never agreed to the terms of the arbitration agreement – the Third Circuit affirmed the district court’s granting of the defendants’ motion to compel arbitration.
Conclusion
Delegation provisions can greatly limit the ability of parties opposing arbitration to defeat motions to compel arbitration. Employers who prefer to arbitrate employment disputes should consider including such provisions in their arbitration agreements, and, if they are considering incorporating in their agreements the rules of alternative dispute resolution organizations, they should familiarize themselves with any delegation provisions in those rules.
If you have questions about this blog, feel free to contact an attorney in the Gibbons Employment & Labor Law Group.