In Fedor v. United Healthcare, the U.S. Court of Appeals for the Tenth Circuit has clarified the outer limits of the severability doctrine that the Supreme Court has developed to limit challenges to the validity of arbitration agreements to situations where a party is able to challenge the arbitration clause itself without bringing in the validity of the agreement as a whole. As the court held in Prima Paint v. Flood & Conklin Mfg., 388 U.S. 395 (1967), if the arbitration clause is valid, the dispute must be sent to arbitration. The Court of Appeals’ opinion in Fedor makes clear that the severability doctrine does not come into play unless there is an underlying arbitration agreement, and whether such an agreement has been formed is for the court, not the arbitrator to decide. In other words, contract formation issues are for the court, not the arbitrator; severability is a channeling provision—channeling aspects of the parties’ dispute to arbitration—that assumes and only kicks in if there is an underlying arbitration agreement.
Prima Paint and Rent-A-Center
The severability doctrine was first adopted as a matter of federal law in Prima Paint. As Justice Fortas explained for the Court, the doctrine was required by § 3 of the Federal Arbitration Act (FAA). 9 U.S.C. §§ 1, 3. Section 3 provides (emphasis supplied):
If any order or proceeding be brought in any of the courts of the United States, upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of such action until such arbitration has been had in accordance with the terms of the agreement . . . .
Because challenges isolated to the invalidity of the arbitration clause are difficult to mount, the effect of Prima Paint was to channel most suits against arbitration to a much later stage in the litigation after an award has been rendered, where the grounds for success are generally quite limited.
In Rent-A-Center, West v. Jackson, 561 U.S. 63 (2010), in cases where the arbitration agreement delegates arbitrability issues to the arbitrator (often called “delegation clauses”), the Court extended the severability doctrine to delegation clauses as well. As Justice Scalia explained for the majority: “unless Jackson challenged the delegation provision specifically, we must treat it as valid under §2, and must enforce it under §§3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator.” Here, too, the effect of Rent-A-Center is to essentially immunize delegations clauses from challenge, unless the challenger can isolate the challenge to that clause rather than one that extends to the arbitration agreement as a whole.
Fedor Facts and Decisions
Dana Fedor worked as a care coordinator for UnitedHealthcare, Inc. (UHC). In 2017, she filed a collective action under the Fair Labor Standards Act (FLSA) and New Mexico’s wage law. After Fedor sued, eight other former employees joined.
UHC moved to compel arbitration, claiming that the plaintiffs were bound by UHC’s arbitration policies (which changed from year to year) requiring employees to settle employment claims in arbitration. The district court found that, while the pre-2016 arbitration policies were illusory, the 2016 policy was not, and it compelled arbitration based on the 2016 policy. The district court did not examine whether the plaintiffs ever agreed to the 2016 policy. Relying on Rent-A-Center, the district court noted that the plaintiffs did not specifically challenge the delegation clause within the 2016 policy. Only Fedor appealed, arguing that “even for arbitration policies containing delegation clauses, courts must first determine whether an agreement to arbitrate was formed before sending the case to an arbitrator.” The Tenth Circuit essentially agreed.
The circuit court began by discussing Rent-A-Center and related cases like Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 298 (2010). It agreed that “[a]n agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”
However, “not all arbitrability issues can be delegated.” The Court of Appeals concluded that “while issues such as the ‘scope’ and ‘enforceability’ of an arbitration clause can be committed to an arbitrator through a ‘[delegation] provision,’ courts must ‘always’ resolve ‘whether the clause was agreed to’ by the parties” (quoting Granite Rock Co., 561 U.S. 287, 297, 299 (2010)). “The issue of whether an arbitration agreement was formed between the parties must always be decided by a court, regardless of whether the alleged agreement contained a delegation clause or whether one of the parties specifically challenged such a clause.” The court asserted that “Courts must . . . first determine whether an arbitration agreement was indeed formed before enforcing a delegation clause therein.”
Here, because the district court did not address the predicate question, namely, whether Fedor and the other plaintiffs had ever agreed to arbitrate, the Tenth Circuit concluded that the district court erred in compelling arbitration. The circuit court vacated the judgment compelling arbitration and remanded for the district court to determine whether an arbitration agreement had been formed between the parties.
Reprinted with permission from the “Jan. 20, 2021, edition of the “New York Law Journal” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.