The Third Circuit Demonstrates That Arbitration Rules Really Do Matter

Some may have wondered whether mentioning the rules of an administrative organization, such as the American Arbitration Association (AAA), in an arbitration agreement could have a legal impact. It can. A number of decisions have considered how referencing specific arbitral rules can affect delegation of authority to an arbitrator or aggregate action issues. See our blog post of Jan. 15, 2019 for a listing of decisions addressing how incorporation of rules can provide evidence of delegation of authority to an arbitrator when deciding arbitrability or the ability to entertain aggregate claims.

In the Richardson v. Coverall North America, Inc., Nos. 18-3393 and 18-3399, opinion of April 28, 2020, the U.S. Court of Appeals for the Third Circuit issued an opinion that once more evaluated an arbitrator’s authority to decide his or her own jurisdiction.

Ericka Richardson and Luis Silva each purchased a franchise for a commercial cleaning business from Coverall North America, Inc. (CNA). Their franchise agreements included arbitration provisions and incorporated the AAA’s Commercial Arbitration Rules (AAA Rules). After disputes arose, Richardson and Silva filed a putative class action claiming they were actually employees of CNA not independent contractors. The district court found that it, rather than the arbitrator, should decide the issue of arbitrability, but the Third Circuit reversed, finding that both agreements delegated the authority to resolve the issues to an arbitrator.

The Agreements

The district court examined whether the parties delegated the question of arbitrability to an arbitrator and whether CNA could enforce the arbitration clause against Richardson. The district court concluded that the inclusion of the AAA Rules in Silva’s agreement did not meet the “clarity” needed for delegation when an “unsophisticated party” was involved.

On appeal, the Third Circuit panel detailed the two-step process used to consider the validating of the arbitration agreement: first, “whether there is a valid agreement to arbitrate,” and second, whether the agreement covers the parties’ dispute. Citing Opalinski v. Robert Half Int’l, Inc., 761 F. 3d 326, 335 (3d Cir. 2014), the panel found that parties could authorize an arbitrator to decide both issues. However, the “delegation requires ‘clea[r] and unmistakabl[e]’ evidence of the parties’ intent.” See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

The panel concluded that citing the AAA Rules in Silva’s arbitration provision was clear and unmistakable evidence that the parties delegated arbitrability issues. Indeed, Silva’s agreement declared that:

“All, controversy, disputes or claims between Coverall … and Franchisee … shall be submitted promptly for arbitration” and that “[a]rbitration shall be subject to … the then current Rules of the [AAA] for Commercial Arbitration.” Slip Op. at 5.

And Rule 7(a) of the AAA Rules provides, in pertinent part, that “[t]he arbitrator shall have the power to rule on his or her jurisdiction … or to the arbitrability of any claim or counterclaim.” The panel viewed the section “about as ‘clear and unmistakable’ as language can get,” citing Awuah v. Coverall N. Am., Inc., 554 F.3d 7, 11 (1st Cir. 2009).

In a footnote, the court indicated it was not holding that reference to the AAA Rules always indicated clear and unmistakable evidence of the parties’ agreement to arbitrate arbitrability. Indeed, in Chesapeake Appalachia, LLC v. Scout Petrol., LLC, 809 F.3d 746, 762-64 (3d Cir. 2016) the Third Circuit found the mention of the AAA Supplementary Rules was not sufficient to conclude that the parties clearly and unmistakably delegated the question of class arbitrability to the arbitrators. See also Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013). But the delegation in Silva’s agreement was clear and required no inferences.

Finally, Silva argued that relying on references to the AAA Rules was improper in agreements with “unsophisticated parties.” The panel found the proposed standard “stretches too far and would disregard the ‘clear and unmistakable’ standard and ignore even the plainest of delegations.” Slip Op. at 6. Hence, the “clarity” of Silva’s agreement demonstrated the intent to delegate the arbitrability issue, requiring reversal of the district court’s ruling and remand of the issue.

As to Richardson, the panel vacated the holding that CNA could not enforce the arbitration clause because it was not a third-party beneficiary of the agreement with Silva. This permitted the district court to consider all the related issues on remand.

Lessons Learned

While the relatively short opinion focused on the AAA Rules, it illustrated that having clear written guidance on arbitration procedures is vital. Companies should not rely solely on organization rules because they may not cover all necessary matters, might change over time or might have provisions that actually hamper the expeditious resolution of claims.

Instead, arbitration agreements should specifically state the required procedures for streamlined dispute resolution. Those procedures or guidelines should include:

The detailed authority of the arbitrator to to decide issues such as arbitrability, the formation of the agreement or waiver.
The inability of the arbitrator to entertain class, collective or aggregate claims, or to provide multiparty relief.
The ability of the arbitrator to grant dispositive motions.
Limitations on depositions, except when the arbitrator rules otherwise.
Specific requirements for the parties to assert viable claims based on the federal or state rules of civil procedure before arbitration begins.
The location or locations where the arbitration hearing can take place, and when it can take place electronically or based solely on documents.
The requirements for an award or decision including findings of fact and conclusions of law.

In a time of mass individual arbitration and challenges to the viability of arbitration agreements, the pertinent requirements for the proceeding should be spelled out in the parties’ agreement, not based solely on an organization’s rules. If the agreement contains its own rules and also references those of an organization, it should be clear that if there is a conflict the rules of the specific agreement prevail.

Bottom Line:

The Third Circuit found that reference to the AAA Rules in an arbitration agreement can provide clear and unmistakable evidence that the parties agreed to delegate arbitrability.