Arbitrating The Arbitrability Of Arbitrability?

Supreme Court holds that court decides whether subsequent forum selection clause supersedes an arbitration agreement, even if the arbitration agreement delegates arbitrability questions to the arbitrators. 

Coinbase, Inc. v. Suski, 144 S.Ct. 1186 (2024).

The Supreme Court has long held that whether a dispute falls within the scope of the parties’ arbitration agreement, an issue often termed “arbitrability,” is a gateway question that is presumptively for the court, rather than the arbitrators, to decide.  However, it is equally well-established that courts will enforce “delegation clauses” reflecting the parties’ “clear and unmistakable” intention to arbitrate the arbitrability question itself.

In Coinbase v. Suski, the Supreme Court was faced with an unusual dilemma: the parties entered two agreements concerning the same transaction with conflicting dispute resolution clauses. One contract contained an arbitration clause delegating arbitrability disputes to arbitration, but a later agreement contained a forum-selection clause providing that all disputes would be submitted to California courts.  In this situation, the Supreme Court ruled that a court in the first instance must determine which contract controls, including whether the delegation clause in the earlier arbitration agreement applied.

The underlying dispute in Coinbase concerned Coinbase’s operation of a sweepstakes program to promote its cryptocurrency exchange platform in which customers could win a cryptocurrency called Dogecoin.  Participants entered two agreements: (1) the Coinbase User Agreement, which contained a broad agreement to arbitrate disputes arising out of use of the cite; and (2) Coinbase’s subsequent Official Rules of the sweepstakes, which contained a broadly worded forum selection clause providing that California courts would have “sole jurisdiction over any controversies” regarding the sweepstakes.

Following conclusion of the sweepstakes, certain participants filed a class action in the United States District Court for the Northern District of California alleging that Coinbase had violated various California laws.

Coinbase moved to compel arbitration, invoking the arbitration clause in the User Agreement.  The participants opposed arbitration, arguing that the forum selection clause in the Official Rules superseded the prior agreement to arbitrate.  Coinbase argued that the delegation clause in the User Agreement’s arbitration provision required the parties to arbitrate whether the User Agreement’s arbitration provision controlled over the Official Rules’ forum selection clause.  The district court and the Ninth Circuit both ruled that the courts, rather than the arbitrators, must decide whether the Official Rules superseded the User Agreement.

The Supreme Court unanimously affirmed.  The Court held that whether the parties agreed to arbitrate arbitrability could only be answered by first “determining which contract applie[d].”  In other words, a threshold determination was needed to determine whether the arbitration provision delegating arbitrability applied to begin with.  The court described this as a “higher-order” determination, which, like other questions regarding whether the parties agreed to arbitrate in the first instance, could only be made by courts.

In so holding, the Court rejected Coinbase’s argument that the arbitration clause was separable from the contract and the delegation clause separable from the arbitration agreement, and thus only a direct challenge to the delegation clause itself was for the courts in the first instance.  The Court held the separability principle inapposite here, because the participants’ challenge applied “equally” to the whole User Agreement and its delegation provision.  Here, the issue was whether the subsequent Official Rules, including the forum selection clause, superseded the entirety of the User Agreement, including the arbitration clause. In these circumstances, the challenge need not go “only” to an arbitration or delegation provision to require judicial resolution.

The Court also rejected Coinbase’s concern that the approach adopted would “invite chaos by facilitating challenges to delegation clauses,” pointing out the approach adopted applies only where the court is called upon to determine which agreement among multiple conflicting contracts governs.  Where there is one contract containing a delegation provision, arbitrability disputes remain arbitrable absent a successful challenge to the delegation provision itself.

In a brief concurrence, Justice Gorsuch observed that, even in the case of multiple agreements, the parties could themselves resolve any conflict by, for example, agreeing to a “master contract” providing that “all disputes arising out of or related to this or future agreements between the parties, including questions concerning whether a dispute should be routed to arbitration, shall be decided by an arbitrator.”  Such a provision, he suggested, “would seem to require a court to step aside.”

Read the court’s full decision here.

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Supreme Court Holds Courts Must Stay Suits After Compelling Arbitration:

Where they issue an order to compel arbitration, courts must stay and lack discretion to dismiss the case, even if all claims are arbitrable.

Smith v. Spizzirri, 601 U.S. 472 (2024).

Section 3 of the Federal Arbitration Act (FAA) states that when a dispute pending in domestic court is subject to arbitration, courts “shall on application of one of the parties stay the trial of the action until such arbitration” has been completed.  Nevertheless, federal courts have been split on whether Section 3 requires a court to stay litigation pending parallel arbitration proceedings, or instead affords courts discretion to dismiss a suit in its entirety when the claims are subject to arbitration.  In Smith v. Spizzirri, the U.S. Supreme Court resolved this dispute, holding that when a party requests a stay of litigation pending arbitration, Section 3 requires a stay, and precludes dismissal.

Smith involved allegations by delivery drivers that their employer, an Arizona delivery service, violated certain federal and state employment laws.  After the employees sued in Arizona state court, the employer removed the case to the U.S. District Court for the District of Arizona and moved both to compel arbitration and dismiss the case.  Although the delivery drivers ultimately conceded that their claims were arbitrable, they maintained that dismissal was unwarranted because Section 3 required the court to stay the litigation pending completion of the parties’ arbitration.

Both the district court and the Ninth Circuit disagreed.  Relying on Ninth Circuit precedent, the district court found that Section 3 allowed it discretion to “either stay the action or dismiss it outright,” and dismissed the case.  On appeal, the Ninth Circuit affirmed, holding itself bound by its prior decisions.  The court, however, acknowledged that “the plain text of the FAA appears to mandate a stay,” and two judges issued concurring opinions stating that the Circuit’s precedent was incorrect and urging the Supreme Court to resolve the issue.

The Supreme Court obliged, unanimously holding that the plain language of Section 3 precludes dismissal of a suit on the basis that all the claims are subject to arbitration.  The word “shall” creates “an obligation impervious to judicial discretion,” and furthermore the “long-established meaning” of “stay’” denotes only a “temporary suspension” of legal proceedings.  In other words, “’shall’ means ‘shall’ and ‘stay’ means ‘stay.’”

The Court further noted that its reading of Section 3 comported with the key underlying goals of the FAA.  First, consistent with a pro-arbitration policy that aims to move parties “out of court and into arbitration as quickly and easily as possible,” the FAA allows for an immediate interlocutory appeal of an order denying a motion to compel arbitration, but not an order compelling arbitration.  Yet, because a dismissal results in an immediately appealable final judgment, interpreting Section 3 to permit courts to dismiss lawsuits while compelling arbitration would in effect allow parties to appeal motions compelling arbitration, despite the FAA “forbid[ing] such an appeal.”  Giving effect to the plain terms of Section 3 therefore preserves the FAA’s pro-arbitration policy of allowing appeals from motions denying, but not those granting, orders to compel arbitration.

Likewise, giving effect to Section 3’s mandate to stay also facilitates the courts’ supervisory role envisioned by the FAA. The FAA provides mechanisms for courts to provide relief in aid of arbitration, including by appointing an arbitrator, enforcing subpoenas issued by arbitrators, and enforcing arbitral awards. Staying a case during the pendency of an arbitration avoids the costs and complications that might arise if a party were required to bring a new suit to obtain the court’s assistance in aid of arbitration.

Read the court’s full decision here.

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New York Federal Court Lacks Jurisdiction to Vacate Arbitration Award Issued Under Swiss Law: 

Only Swiss courts have the power to vacate an award “made” in Switzerland.

Molecular Dymanics, Ltd. V. Sprectrum Dynamics Medical Ltd., Case No. 22 Civ. 5167 (KPF) (S.D.N.Y. July 23, 2024).

In the context of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), the courts of the country under whose laws an arbitration award is “made” – i.e., the “seat” of the arbitration – are said to have “primary jurisdiction” over the award.  Other States in which enforcement may be sought are said to have “secondary jurisdiction.”

It is generally accepted that, under the Convention, only courts in the primary jurisdiction may set aside an award as invalid under its own laws. Courts of secondary jurisdiction may rule only on the enforceability of the award and may only deny enforcement on the limited grounds set forth in the Convention.

In Molecular Dynamics, the Southern District of New York applied these principles in holding that it lacked jurisdiction to apply the provisions of Section 10 of the Federal Arbitration Act (FAA) to vacate an award issued in Switzerland under Swiss law.

The underlying dispute arose out of a series of agreements establishing a joint venture known as Molecular Dynamics or “MD,” which concerned the development of certain nuclear medicine devices.  All of the relevant agreements provided that they were governed by New York law, and that any disputes arising out of the venture were to be resolved through arbitration in Geneva, Switzerland under the Swiss Rules of International Arbitration of the Swiss Chambers Arbitration Institution.”  These included a License Agreement, which also contained a forum selection clause providing that “on matters of injunctive relief” New York courts would have non-exclusive jurisdiction, and “on matters concerning the Chosen Arbitration,” New York courts would have “exclusive jurisdiction.”

After disputes arose under the Licensing Agreement, the licensee Spectrum terminated the agreement and filed a Notice of Arbitration with the Swiss Arbitration Center.  The arbitration was held between April 2018 and May 2022, during which time MD claimed a number of irregularities, including fraudulent and perjurious conduct by Spectrum, the resignation of one of the arbitrators due to allegations of bias and conflict of interest, and the tribunal’s refusal to reopen proceedings in response to the alleged submission of new evidence.

Despite these protests, the tribunal issued a Partial Award in favor of Spectrum and a Final Award awarding costs to Spectrum.  Following issuance of the Partial Award, MD filed a petition in the Southern District of New York to vacate the award under Section 10 the FAA claiming, inter alia, that (i) the award was procured by fraud and tainted by evident partiality; and (ii) the arbitrators committed misconduct.  It later amended its petition to also seek vacatur of the Final Award on the same grounds.

Spectrum opposed the petition, arguing that the court lacked jurisdiction to vacate the award because the award was made in Switzerland under Swiss law.  The court agreed.

The court began its analysis by explaining that, under Article V(1)(e) of the New York Convention, “only a ‘competent authority’ of the country in which, or under the law of which, an award was made, may vacate or annul the award under domestic law.”  Whether the court was “competent” under Article V(1)(e) went to the court’s subject matter jurisdiction.  And a court outside the seat, sitting in secondary jurisdiction, lacks subject matter jurisdiction “over claims seeking to vacate, set aside, or modify foreign arbitral awards.”

The court held that Switzerland had primary jurisdiction over the award because the parties’ agreement called for arbitration in Switzerland, the tribunal explicitly recited, without objection, that the awards were rendered under Swiss law, and there is a “strong presumption,” absent explicit agreement to the contrary, that the place of arbitration designated by the parties “also designates the law under which the award is made.”  Accordingly, the award was “made” in Switzerland, and Swiss courts had exclusive jurisdiction to vacate or annul the awards.

The court rejected petitioners’ claim that the forum selection clause in the License Agreement evidenced the parties’ intent to “bifurcate primary jurisdiction” such that “Swiss arbitral law would govern the conduct of the arbitration, while U.S. arbitral law would govern any post-award proceedings, including to vacate.”

First, the court noted, the forum selection clause “specifies neither that it applies to applications to vacate an award, nor that the United States is intended to serve as the primary jurisdiction for the arbitration.”  More fundamentally, for the court, such agreement would impermissibly “circumvent” the New York Convention.  The forum selection clause had to be interpreted “in light of the New York Convention,” which governed the agreement from the outset.  The Convention contemplates only that that the courts of the country in which or under the laws of which an award is made “will be free to set aside or modify an award in accordance with its domestic law,” while “all other states have only ‘limited authority’ to review arbitral awards.”  It was “settled” that “U.S. courts can apply the domestic provisions of the FAA” to vacate awards governed by the Convention,” and made in the United States.  But the court was aware of “no decision from a U.S. court in the 54 years since this country acceded to the New York Convention … holding that a U.S. court could vacate an award made in a foreign state under foreign law.”

Read the court’s full decision here.

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Second Circuit Holds Section 1782 Discovery Not Available In Aid Of ICSID Arbitration:

ICSID panel does not qualify as a “foreign or international tribunal” under Section 1782.

Webuild S.P.A. v. WSP USA Inc., 2024 WL 3463380 (2d Cir. July 19, 2024).

Section 1782, a federal statute (28 U.S.C. § 1782), allows U.S. federal courts to compel witness testimony and document discovery for “use in a proceeding in a foreign or international tribunal.”  In 2022, U.S. Supreme Court decided ZF Automotive US, Inc. v. Luxshare, Ltd. and AlixPartners, LLC v. Fund for Protection of Investors’ Rights in Foreign States, resolving a long-standing conflict among lower federal courts by ruling that neither private commercial arbitration tribunals nor tribunals presiding over ad hoc investor-state arbitrations were “foreign tribunals” within the meaning of Section 1782.

However, the Court seemingly left open whether a tribunal constituted under the aegis of the International Centre for Settlement of Investment Disputes (“ICSID”) qualified as a “foreign or international tribunal” under Section 1782.

In Webuild S.P.A. v. WSP USA Inc., the Second Circuit addressed this very issue, holding that an ICSID tribunal also does not qualify as an “international tribunal” under Section 1782.

The Webuild case arose in connection with an arbitration between Italian company Webuild and Panama under the Italy-Panama bilateral investment treaty.  Webuild obtained an ex parte order from the U.S. District Court for the Southern District of New York permitting it to subpoena evidence from WSP, a non-party located in New York.  Upon being served with the subpoena, WSP moved to vacate the order and quash the ensuing subpoena.

The district court granted WSP’s motion and quashed the subpoena.  Webuild appealed, and the Second Circuit affirmed, holding that the ICSID tribunal “does not qualify as a ‘foreign or international tribunal’ as that term is used in [Section] 1782.”

The Second Circuit, relying on the Supreme Court’s reasoning in ZF Automotive, found that ICSID tribunals were not meaningfully distinguishable from other private tribunals constituted pursuant to agreements to arbitrate, and appointed and funded by the parties.  While sovereign States may help to fund the ICSID Centre, these sovereign contributions do “not fund the Tribunal, directly or indirectly,” which is “instead funded through advances on arbitrator fees and expenses paid by the parties.”

The Second Circuit rejected Webuild’s contention that ICSID tribunals were different because of “the ICSID Convention’s unique post-award procedures (both through annulment and enforcement mechanisms),” reasoning that “these procedures merely facilitate the enforcement of ICSID awards.”  These so-called unique post-award procedures, which include the Convention’s requirement that member States treat ICSID awards as judgments of their own courts, did not otherwise demonstrate an “exercise of governmental authority” or indicate that “the Webuild Tribunal is itself imbued with governmental authority.”

The Second Circuit also rejected Webuild’s argument that sovereign States “play[] a more significant role in the composition of [ICSID] panels” because arbitrators may be appointed from “an ICSID-maintained Panel of Arbitrators” selected by member States.  But here, the court’s decision was arguably narrower.  It held the “possibility” of ICSID’s involvement in composing the tribunal “has no relevance to this case, as the parties agreed on the arbitrators and the [ICSID] Chairman did not appoint any member of the Webuild Tribunal.”  This potentially leaves open the question of whether Section 1782 discovery might be available in aid of an ICSID arbitration where the arbitrators are appointed by ICSID from the State-approved roster of arbitrators.  Whether that narrow class of ICSID tribunals qualifies as an “international tribunal” under Section 1782 remains to be seen, but it is clear that the availability of Section 1782 discovery for use in international arbitration has been further curtailed.

Read the court’s full decision here.