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Sixth Circuit emphasizes the importance of challenging an arbitration… Sixth Circuit emphasizes the importance of challenging an arbitration… Saturday, December 4, 2021

Who decides whether parties to an arbitration agreement have to arbitrate their dispute?  If there’s a delegation clause, it’ll be the arbitrator—unless a party specifically challenges the delegation clause.  The Sixth Circuit issued a 2-1 decision in In re: StockX Customer Data Security Breach Litigation emphasizing this point and declining to rule on an arbitration agreement’s enforceability because the agreement contained a so-called “delegation clause.”

When an arbitration agreement has a delegation clause, that means the parties have agreed that an arbitrator will decide not only the merits of their dispute, but also “gateway” questions of arbitrability—i.e., whether the dispute falls within the scope of the arbitration agreement and whether the arbitration agreement is enforceable. But what if a party wants to avoid arbitration because the delegation clause itself is unenforceable?  The Supreme Court answered that question in Rent-A-Center v. Jackson: a party must specifically challenge the delegation clause’s enforceability, separate and apart from any challenge to the arbitration agreement or the underlying contract as a whole.  Without such a challenge, the only issue a court can decide is whether an agreement exists.

In StockX, eight named plaintiffs brought a putative class action alleging consumer protection law violations, and StockX moved to dismiss in favor of arbitration.  In response, the plaintiffs argued that no enforceable agreement existed for plaintiffs that were minors and that the agreement was unconscionable.

The court declined to rule on the plaintiffs’ arguments, finding that each was delegated to an arbitrator under a delegation clause.  This included the infancy argument, because, if successful, the contract would be “voidable,” not “nonexistent.”  The only way the court could have considered the plaintiffs’ argument, pursuant to Rent-A-Center, was if they specifically challenged the delegation clause.  Judge Guy, the authoring judge, along with Judge Gibbons, said the parties didn’t.  Though the plaintiffs challenged the entire contract—including the delegation clause—as invalid under the infancy doctrine and unenforceable, that alone did not suffice because “a party’s mere statement that it is challenging the delegation provision is not enough.”

Judge Moore dissented because, in her view, a minor who has disaffirmed a contract should not be subject to the contract’s delegation provision.  Analogizing to the Tenth Circuit’s treatment of a mental-capacity challenge, she reasoned that an infancy challenge should be viewed as going to “the very ‘making’ of the agreement.”  She also would have concluded that an infancy challenge applying to both the delegation provision and the contract as a whole sufficed and contrasted the plaintiffs’ challenges with cases where parties failed to even mention the delegation provision.

This case follows a line of similar cases strictly enforcing delegation provisions.  Earlier this year in Swiger v. Rosette, a plaintiff sought to avoid arbitrating her claim but was unable to do so when she failed to mention, let alone challenge, her contract’s delegation clause.  There, the Sixth Circuit found it not to matter that the defendant was a non-signatory to the plaintiff’s contract, because the enforceability of the contract as to the non-signatory was a matter for the arbitrator to decide.  (See also Blanton v. Domino’s Pizza (enforcing delegation clause against non-signatory)).

The takeaway?  If one wants a court to determine whether an arbitration agreement is enforceable, they must check if there’s a delegation clause and, if so, specifically challenge it; otherwise, they’ll be left arbitrating whether they should be arbitrating.

Article authored by Ellen Phillips.  Saturday, December 4, 2021

Who decides whether parties to an arbitration agreement have to arbitrate their dispute?  If there’s a delegation clause, it’ll be the arbitrator—unless a party specifically challenges the delegation clause.  The Sixth Circuit issued a 2-1 decision in In re: StockX Customer Data Security Breach Litigation emphasizing this point and declining to rule on an arbitration agreement’s enforceability because the agreement contained a so-called “delegation clause.”

When an arbitration agreement has a delegation clause, that means the parties have agreed that an arbitrator will decide not only the merits of their dispute, but also “gateway” questions of arbitrability—i.e., whether the dispute falls within the scope of the arbitration agreement and whether the arbitration agreement is enforceable. But what if a party wants to avoid arbitration because the delegation clause itself is unenforceable?  The Supreme Court answered that question in Rent-A-Center v. Jackson: a party must specifically challenge the delegation clause’s enforceability, separate and apart from any challenge to the arbitration agreement or the underlying contract as a whole.  Without such a challenge, the only issue a court can decide is whether an agreement exists.

In StockX, eight named plaintiffs brought a putative class action alleging consumer protection law violations, and StockX moved to dismiss in favor of arbitration.  In response, the plaintiffs argued that no enforceable agreement existed for plaintiffs that were minors and that the agreement was unconscionable.

The court declined to rule on the plaintiffs’ arguments, finding that each was delegated to an arbitrator under a delegation clause.  This included the infancy argument, because, if successful, the contract would be “voidable,” not “nonexistent.”  The only way the court could have considered the plaintiffs’ argument, pursuant to Rent-A-Center, was if they specifically challenged the delegation clause.  Judge Guy, the authoring judge, along with Judge Gibbons, said the parties didn’t.  Though the plaintiffs challenged the entire contract—including the delegation clause—as invalid under the infancy doctrine and unenforceable, that alone did not suffice because “a party’s mere statement that it is challenging the delegation provision is not enough.”

Judge Moore dissented because, in her view, a minor who has disaffirmed a contract should not be subject to the contract’s delegation provision.  Analogizing to the Tenth Circuit’s treatment of a mental-capacity challenge, she reasoned that an infancy challenge should be viewed as going to “the very ‘making’ of the agreement.”  She also would have concluded that an infancy challenge applying to both the delegation provision and the contract as a whole sufficed and contrasted the plaintiffs’ challenges with cases where parties failed to even mention the delegation provision.

This case follows a line of similar cases strictly enforcing delegation provisions.  Earlier this year in Swiger v. Rosette, a plaintiff sought to avoid arbitrating her claim but was unable to do so when she failed to mention, let alone challenge, her contract’s delegation clause.  There, the Sixth Circuit found it not to matter that the defendant was a non-signatory to the plaintiff’s contract, because the enforceability of the contract as to the non-signatory was a matter for the arbitrator to decide.  (See also Blanton v. Domino’s Pizza (enforcing delegation clause against non-signatory)).

The takeaway?  If one wants a court to determine whether an arbitration agreement is enforceable, they must check if there’s a delegation clause and, if so, specifically challenge it; otherwise, they’ll be left arbitrating whether they should be arbitrating.

Article authored by Ellen Phillips.  © Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 338 © Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 338

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