Disputes as to arbitrability ensued, and the trial court held that even though the arbitration clauses in question required disputes to be resolved under the AAA Rules, which afford arbitrators the right to rule on their own jurisdiction, incorporation of the AAA Rules did not constitute clear and unmistakable evidence that the parties intended to delegate arbitrability questions to the arbitrator.⁹ The Franchise Defendants appealed that ruling.¹⁰

The Third Circuit reversed the trial court and held that the section of the AAA Rules that grants arbitrators the power to rule on their own jurisdiction is “about as clear and unmistakable as language can get.”¹¹ The Third Circuit therefore concluded that by agreeing to arbitrate under the AAA Rules, the parties in Richardson had provided clear and unmistakable evidence of their intent to assign arbitrability questions to the arbitrator. In so doing, the Third Circuit rejected the Plaintiffs’ argument that relying on incorporated rules as evidence of the parties’ intent to delegate arbitrability in agreements involving “unsophisticated parties” was unreasonable.¹²

2. Blanton background

Blanton similarly involved franchise issues, and arose out of claims that were brought by an employee who had been fired by one restaurant franchisee after he took a second job with a another restaurant franchisee.¹³ After being fired, the employee sued the franchisor (which had not signed an arbitration agreement with the employee) in court, alleging that the franchisor had contractually procured his termination.¹⁴

The franchisor moved to compel arbitration, and the employee opposed the motion on grounds that the franchisor had not signed an arbitration agreement with him.¹⁵ The trial court, however, found that the employee had signed an agreement with the franchisee agreeing to arbitrate under the AAA Rules, and that by doing so, the employee had assigned arbitrability questions to the arbitrator to decide.¹⁶ The trial therefore compelled arbitration, which the employee appealed.¹⁷

 On appeal, the Sixth Circuit affirmed the trial court’s decision to compel arbitration, because it found that agreeing to arbitrate under the AAA Rules provided “compelling evidence that . . . [the employee] agreed to arbitrate ‘arbitrability’.”¹⁸ In reaching that conclusion, the Sixth Circuit also rejected any suggestion that the employee’s sophistication was a valid consideration, noting that “nothing in the Federal Arbitration Act purports to distinguish between ‘sophisticated’ and ‘unsophisticated’ parties.”¹⁹

C. The Third and Sixth Circuits join the majority of Federal Appellate Courts which hold that incorporating arbitral rules that afford competence-competence constitute clear and unmistakable evidence under the First Options test

In holding that the AAA Rules provide clear an unmistakable evidence of an intent to assign arbitrability to the arbitrators, the Third Circuit and the Sixth Circuit have joined the First, Second, Fourth, Fifth, Eighth, Ninth, Tenth, Eleventh and Federal Circuit Courts of Appeal, which have all similarly held that agreeing to arbitrate under rules that permit arbitrators to rule on their own jurisdiction constitutes clear and unmistakable evidence under the First Options test.²⁰ Consequently, as the Sixth Circuit noted in Blanton, eleven out of twelve federal courts of appeal now view the acceptance of arbitral rules that enshrine competence-competence as clear and unmistakable evidence of an intent to assign arbitrability to arbitrators.²¹

D. The U.S. restatement on international arbitration challenges the majority position

Despite the near universal acceptance of that position, the Restatement of U.S. Law of International and Investor-State Arbitration, which was approved in 2019, has criticized the majority rule.²² In fact, the chief reporter of the Restatement even argued against the majority rule in an amicus brief submitted to the United States Supreme Court in Henry Schein in 2019.²³

The chief reporter argued in that submission that arbitral rules give arbitrators permissive – but not exclusive – authority to determine their jurisdiction, and thereby fail to divest courts of their ultimate authority to make arbitrability determinations.²⁴ The chief reporter further rejected the majority approach as incompatible with First Options on grounds that competence-competence provisions are found in virtually all modern arbitral rules, so treating them as unmistakable evidence of an intent to delegate arbitrability questions to the arbitrators “makes the court’s right to determine arbitrability the exception” rather than the rule.²⁵

The Supreme Court avoided the question in Henry Schein, however, and is unlikely to take it up in the future given the number of appellate courts that have reached a consistent conclusion.²⁶ The de facto rule in the United States has therefore become that adopting arbitral rules which permit for competence-competence will assign arbitrability questions to the arbitrators.

E. Implications of the Richardson and Blanton decisions

The Richardson and Blanton decisions highlight four key points that parties and practitioners must keep in mind when drafting arbitration clauses.

First, practitioners must clearly draft arbitration clauses to achieve the outcome that parties typically desire in this context: certainty. If parties wish to have arbitrators decide questions of arbitrability, rather than simply relying on arbitral rules that provide for competence-competence and case law that could theoretically change, they should expressly state their intent in the arbitration clause, which avoids costly and uncertain satellite litigation. Conversely, if parties wish to have courts decide arbitrability questions, they should consider expressly stating that intent in the arbitration clause, particularly if they adopt arbitral rules that provide for competence-competence.

Second, parties must strategically consider matters like seat selection when drafting arbitration clauses. Not only do national arbitral laws differ from country to country, but laws can differ within the United States from circuit to circuit, and parties that select seats without a proper understanding of the implications or for the wrong reasons (like assuming that arbitral hearings must be held there) can face unwelcome consequences.

Third, parties must closely monitor trends and developments in jurisdictions in which they seat arbitrations to ensure that the judiciary supports arbitration and has not changed the playing field with an unexpected decision. For example, Richardson left open the possibility that “where an agreement incorporates the AAA Rules, a contract might still otherwise muddy the clarity of the parties’ intent to delegate” questions of arbitrability to the arbitrator.²⁷ Indeed, the Supreme Court has recently granted certiorari to determine whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.²⁸ The outcome of that case may further alter the landscape of the arbitrability debate.

Finally, while all U.S. jurisdictions are bound by the myriad of pro-arbitration decisions that the U.S. Supreme Court has issued over the last several years, some jurisdictions are still more arbitration-friendly than others, and the same holds true for jurisdictions around the world, even if those jurisdictions have acceded to the New York Convention.

F. Conclusion

Richardson represents a positive development that adds further clarity to the arbitrability debate. Parties and practitioners should closely follow the lessons it teaches.

About Reed Smith’s international arbitration practice

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1. Case Nos. 18-3393, 18-3399, 2020 U.S App. LEXIS 13568 (3d Cir. April 28, 2020).
2. Case No. 19-2388, 2020 U.S. App. LEXIS 18975 (6th Cir. June 17, 2020).1
3. 514 U.S. 938, 944 (1995).
4. Id., at 943-45.
5. 139 S. Ct. 524, 529 (2019).
6. Richardson, 2020 U.S App. LEXIS 13568, at *1-3.
7. Id., at *2-3.
8. Id., at *3.
9. Richardson v. Coverall N. Am., Inc., Case No. 18-532 (MAS) (TJB), 2018 U.S. Dist. LEXIS 167240, at *8-12 (D.N.J. Sep. 27, 2018) (holding that, at least where parties are unsophisticated, incorporation of the AAA Rules in a contract is insufficient evidence of the parties’ intent to assign arbitrability questions to the arbitrator).
10. Richardson, 2020 U.S App. LEXIS 13568, at *4.
11. Id., at *5 (quoting Awuah v. Coverall N. Am., Inc., 554 F.3d 7, 11 (1st Cir. 2009)).
12. Id., at *5.
13. Blanton, 2020 U.S. App. LEXIS 18975, at *2-3.
14. Id., at *3.
15. Id.
16. Id.
17. Id.
18. Id., at *6.
19. Id., at *20-21.
20. See, e.g., Awuah v. Coverall North Am. Inc., 554 F.3d 7, 11 (1st Cir. 2009) (finding that the inclusion of arbitral rules allowing arbitrators to decide their own jurisdiction constituted clear and unmistakable evidence under First Options); Contec Corp. v. Remote So., Co., 398 F.3d 205, 208 (2d Cir. 2005) (concluding that “when, as here, parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”); Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d 522, 527-28 (4th Cir. 2017) (concluding that the explicit incorporation of arbitral rules that enshrine competence-competence “serves as ‘clear and unmistakable’ evidence of the parties intent to arbitrate arbitrability”); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co. 687 F.3d 671, 675 (5th Cir. 2012) (relating that “[w]e agree with most of our sister courts that the express adoption of these rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability”); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009) (concluding that “the arbitration provision’s incorporation of the AAA Rules . . . constitutes a clear and unmistakable expression of the parties’ intent to leave the question of arbitrability to an arbitrator”); Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015) (accepting that incorporating arbitral rules that give arbitrators the right to rule on their own jurisdiction constitutes clear and unmistakable evidence under First Options); Belnap v. IASIS Healthcare, 844 F.3d 1272, 1281 (10th Cir. 2017) (finding that parties “clearly and unmistakably agreed to arbitrate arbitrability when they incorporated” arbitral rules that afford arbitrators competence-competence); Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332-33 (11th Cir. 2005) (deciding that “the parties clearly and unmistakably agreed that the arbitrator should decide whether the arbitration clause is valid” by incorporating arbitral rules that give the arbitrator competence to decide arbitrability); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373 (Fed. Cir. 2006) (finding that the arbitration clause which incorporated arbitral rules that recognize competence-competence “clearly and unmistakably shows the parties' intent to delegate the issue of determining arbitrability to an arbitrator”).
21. Blanton, 2020 U.S. App. LEXIS 18975, at *7. Notably, as the court recognized in Blanton, the Sixth Circuit had previously decided in 2019 that incorporating arbitral rules that enshrined competence-competence provided clear and unmistakable evidence, see McGee v. Armstrong, 941 F.3d 859, 866 (6th Cir. 2019) (accepting that the designation of arbitral rules that allow arbitrators to decide their own jurisdiction was clear and unmistakable evidence under First Options), but stated that “to the extent that there’s any ambiguity in our prior decisions, we officially” adopt that rule with Blanton. 2020 U.S. App. LEXIS 18975, at *8.
22. Restatement of the U.S. Law of International Commercial and Investor-State Arbitration sections 2-8 reporter’s note b(iii) (Proposed Final Draft, April 24, 2019). An earlier draft of the Restatement was more explicit in its criticism of the majority rule. See Restatement of the U.S. Law of International Commercial and Investor-State Arbitration sections 2-8 reporter’s note b(iii) (Tentative Draft No. 4, 2015) (“The Restatement rejects the majority line of cases as based on a misinterpretation of the institutional rules being applied”).
23. Brief for Professor George A. Bermann as Amici Curiae supporting Petitioners, Henry Schein, Inc. v. Archer & White Sales, Inc. 139 S. Ct. 524, 529 (2019).
24. Id., at 10-15.
25. Id., at 12-13.
26. Henry Schein, 139 S. Ct. at 531 (expressing “no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator” when the arbitration clause called for disputes to be resolved under the AAA Commercial Rules, which allow arbitrators to rule on their own jurisdiction).
27. Richardson, 2020 U.S App. LEXIS 13568, at *4 (referring to Chesapeake Appalachia, LLC v. Scout Petrol, LLC, 809 F.3d 746, 763-64 (3d Cir. 2016), which held that that incorporation was insufficient because it required a daisy chain of inferences).
28. Henry Schein, Inc. v. Archer and White Sales, Inc., 935 F.3d 274, cert granted, 2020 WL 3146679 (June 15, 2020).

Client Alert 2020-413