In Brennan v. Opus Bank, 796 F.3d 1125 (9th Cir. 2015), the Ninth Circuit held that express incorporation of American Arbitration Association rules in an arbitration clause constitutes clear and unmistakable evidence that the contracting parties agreed to arbitrate arbitrability. Applying the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772 (2010), the Ninth Circuit held that incorporation of such rules was a delegation provision severable from the rest of the arbitration clause.
Plaintiff, Carey Brennan, a former executive at Defendant Opus Bank (“Opus”), filed suit against Opus in federal district court for breach of his Employment Agreement (the “Agreement”) and wrongful termination under California and Washington state law. The Agreement contained an arbitration provision which provided in relevant part: “Except with respect to any claim for equitable relief . . . any controversy or claim arising out of this Agreement or [Brennan’s] employment with the Bank or the termination thereof . . . shall be settled by binding arbitration in accordance with the Rules of the American Arbitration Association.” The Agreement also provided that in the event of arbitration, “the parties shall retain the rights of all discovery provided pursuant to the California Code of Civil Procedure” and “[a]ll rights, causes of action, remedies and defenses available under California law and equity . . . as though in a court of law.”
Notwithstanding the arbitration clause, Plaintiff argued that his claims should be litigated in court because the arbitration clause was both procedurally and substantively unconscionable. Opus moved to compel arbitration pursuant to the arbitration clause and the Federal Arbitration Act (“FAA”). Opus argued that the question of whether the arbitration clause was unconscionable had to be decided by the arbitrator instead of the court because the clause expressly incorporated the Rules of the American Arbitration Association (“AAA”), one of which states that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the . . . validity of the arbitration agreement.” The district court agreed that the express incorporation of the AAA rules constituted clear and unmistakable evidence that the parties intended to have this unconscionability question decided by an arbitrator, and, applying federal arbitrability law, dismissed the action in favor of arbitration.
On appeal, Plaintiff argued that California law, not federal law, should apply, and that under California law the district court erred in concluding that the specific provision in the arbitration clause incorporating the AAA rules (the “delegation provision”) clearly and unmistakably delegated to an arbitrator the question of whether the arbitration clause was unconscionable.
First, the Ninth Circuit held that federal substantive law governed the arbitrability question by default, because the Agreement, as a contract evidencing a transaction involving commerce, was covered by the FAA, and the parties did not clearly and unmistakably agree to apply nonfederal arbitrability law. The court noted that although the Agreement made clear that California’s procedural rules, rights, and remedies would apply during an arbitration, it did not address whether California law governs whether certain disputes are to be submitted to arbitration in the first place. Without such an express statement, the court found the clause ambiguous on the law applicable to arbitrability and, therefore, federal arbitrability law applied.
Second, noting a consensus among circuits considering the issue, the Ninth Circuit agreed with the district court that incorporation of the AAA rules constitutes clear and unmistakable evidence that the contracting parties agreed to arbitrate arbitrability. Although acknowledging that this case involved sophisticated parties, the court specified that its holding does not foreclose the possibility that the same rule could apply to unsophisticated parties or to consumer contracts.
Plaintiff also argued that by carving out “any claim for equitable relief” from the arbitration clause, the parties removed the unconscionability question from its scope because unconscionability is an equitable matter under California law. The Ninth Circuit disagreed. First, it held that reliance on an arbitration clause to avoid litigation is an equitable defense, not a claim for equitable relief. Second, it reasoned that Plaintiff’s argument directly contradicted the clear and unmistakable delegation of the unconscionability determination to the arbitrator through the delegation provision in the same clause.
Finally, the Ninth Circuit addressed Plaintiff’s argument that the district court erred in requiring him to challenge the specific delegation provision inside of the arbitration clause as unconscionable in order for the court, rather than the arbitrator, to determine the validity of the arbitration clause. In Plaintiff’s view, the enforceability of the arbitration clause is a question for the court so long as the party challenges the enforceability of the arbitration clause specifically, rather than the entire contract generally. The Ninth Circuit disagreed, holding that the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772 (2010) required taking the principle a step further in cases involving multiple, severable arbitration agreements. Treating the delegation provision and the arbitration clause in which it resided as two severable arbitration agreements, the Ninth Circuit reasoned that the delegation provision was the specific agreement at issue, and that Plaintiff failed to make any arguments specific to the delegation provision, instead arguing that the arbitration clause as a whole was unconscionable. Therefore, the court held that the issue of unconscionability was for the arbitrators to decide and affirmed the district court’s dismissal of the case in favor of arbitration.
A version of this post originally appeared in the November 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.