Who Decides “Gateway” Issues of Arbitrability? The Second Department Weighs InPrint Article
- Posted on: Jan 4 2021
When parties to a contract delegate the question of arbitrability to an arbitrator, the courts will enforce the agreement as written. They may not, without more, decide the arbitrability issue. This “is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc. v Archer & White Sales, Inc., _____ U.S. at _____, 139 S.Ct. 524, 529 (2019). Thus, “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court [will] not decide the arbitrability issue.” Id. at 139 S.Ct. at 530.
This well-recognized principle of law was at issue in Revis v. Schwartz, 2020 N.Y. Slip Op. 08094 (2d Dept. Dec. 30, 2020) (here). In Revis, the Appellate Division, Second Department affirmed the motion court’s decision to compel arbitration and to stay the action pending completion of the arbitration on the grounds that the parties intended to arbitrate their disputes. In particular, the parties had agreed to arbitrate “gateway” questions of arbitrability.
General Legal Principles
A. Federal Law
Under the Federal Arbitration Act (9 U.S.C. § 1 et. seq.) (the “FAA”), agreements to arbitrate “reflect the overarching principle that arbitration is a matter of contract” and, therefore, are “‘rigorously enforce[d]’ according to their terms.” American Express Co. v. Italian Colors Rest., 570 U.S. 228, 232 (2013) (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985)); Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010).
B. New York State Law
The Civil Practice Law and Rules (“CPLR”) provides that “[a] written agreement to submit any controversy … to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.” CPLR §7501. “A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration.” CPLR § 7503(a). “If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action.” Id. With limited exception, “[w]here there is no substantial question whether a valid agreement was made or complied with, … the court shall direct the parties to arbitrate.” Id. See Sutphin Retail One, LLC v. Sutphin Airtrain Realty, LLC, 143 A.D.3d 972, 973 (2d Dept. 2016). If the application for an order compelling arbitration is granted, “the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.” CPLR § 7503(a)).
Pursuant to the foregoing procedure, the courts are to perform the initial screening process in order to determine “whether the parties have agreed that the subject matter under dispute should be submitted to arbitration.” Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am., 37 N.Y.2d 91, 96 (1975). “Once it appears that there is, or is not a reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract, the court’s inquiry is ended.” Id. at 96. “Penetrating definitive analysis of the scope of the agreement must be left to the arbitrators whenever the parties have broadly agreed that any dispute involving the interpretation and meaning of the agreement should be submitted to arbitration.” Id.
Accordingly, on a motion to compel or stay arbitration, a court must determine, “in the first instance … whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement.” Sisters of St. John the Baptist, Providence Rest Convent v. Geraghty Constructor, 67 N.Y.2d 997, 998 (1986). “When deciding whether the parties agreed to arbitrate a certain matter … courts generally … should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
Notably, “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” Rent-A-Center, 561 U.S. at 68-69; see also First Options, 514 U.S. at 943; Monarch Consulting, 26 N.Y.3d at 666. The reason: “parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” Henry Schein, Inc. v. Archer & White Sales, Inc., _____ U.S. _____, _____, 139 S.Ct. 524, 530 (2019) (quoting First Options, 514 U.S. at 944).
Revis v. Schwartz
1. Factual and Procedural Background
A. Allegations in the Complaint
Darelle Revis, the former football player, and his wholly owned corporate entity Shavae, LLC (“Shavae”), commenced the action to recover damages for, among other things, breach of fiduciary duty, breach of contract, and fraud.
In January 2007, Revis and defendant Neil Schwartz, a partner in defendant Schwartz & Feinsod, LLC (“S & F”), a law firm that provides legal services to professional football players, entered into a Standard Representation Agreement (the “SRA”) in accordance with the National Football League Players Association Regulations Governing Contract Advisors (the “NFLPA Regulations”). Pursuant to the SRA, “Schwartz would represent … Revis as his attorney and contract advisor” and serve as “his exclusive representative with respect to negotiating player contracts with NFL clubs.”
Revis further alleged that on some unspecified date, he and Schwartz entered into a separate oral agreement, pursuant to which “Schwartz would provide a range of legal services to … Revis in return for a 10% contingent fee from amounts received by … Revis for marketing and endorsement agreements handled by … Schwartz on … Revis’s [sic] behalf.” Revis maintained that the SRA was the only written agreement between Revis and Schwartz, and that the SRA contained the only memorialization of the terms of the alleged oral agreement. In this regard, the SRA indicated that Revis and Schwartz had entered into “separate agreements” and included, inter alia, the following description of the services covered by them: “Marketing & Endorsements – Ten (10%) Percent – Cash Only.” The complaint alleged that “[w]hen Shavae was formed … Schwartz provided legal services to Shavae under the terms of his oral legal engagement agreement with … Revis.”
The complaint contained eight causes of action. Each of the causes of action was asserted by both Revis and Shavae, and the complaint alleged that both plaintiffs were entitled to the remedies requested for each cause of action.
B. The Defendants’ Motion to Compel Arbitration
Defendants moved, pursuant to CPLR § 7503, to compel arbitration of the matter and to stay all proceedings pending arbitration. In support of their motion, defendants submitted, inter alia, a copy of the SRA, a copy of the NFLPA Regulations, and a copy of the Labor Arbitration Rules of the American Arbitration Association (the “AAA Rules”). Defendants cited to separate arbitration provisions in the SRA and in the NFLPA Regulations, and argued, among other things, that “[t]he broad language of the binding arbitration provisions in the SRA and Regulations plainly cover[ed] [the plaintiffs’] claims here.” Defendants further argued that, by incorporating the AAA Rules into the NFLPA Regulations, the parties had agreed to delegate any threshold arbitrability questions to the arbitrator.
Plaintiffs opposed the motion. Plaintiffs argued that defendants “failed to present sufficient evidence of a clear and unequivocal intent to arbitrate the claims at issue.” Plaintiffs contended that their “legal claims … [were] wholly separate from the rights and duties created under the SRA.” Plaintiffs asserted that their “claims [arose] from … Schwartz’s separate agreement to provide other legal services to … Revis and his company, Shavae.”
The motion court granted defendants’ motion. The motion court stated that “[i]t [was] clear … that the parties entered into a valid arbitration agreement and that the issues stated in the Summons and Complaint are encompassed within the SRA’s broad arbitration clause.” The motion court rejected plaintiffs’ contention “that the claims in this action are wholly separate from the rights and duties created under the SRA.” Plaintiffs appealed.
In a 3-2 decision, written by Justice Miller, the Second Department affirmed.
3. The Court’s Decision
A. The Signatories
Under the SRA, and in particular the paragraph titled “Disputes,” the parties to the SRA agreed that: “Any and all disputes between Player and Contract Advisor involving the meaning, interpretation, application, or enforcement of this Agreement or the obligations of the parties under this Agreement shall be resolved exclusively through the arbitration procedures set forth in Section 5 of the NFLPA Regulations Governing Contract Advisors.” The SRA incorporated the NFLPA Regulations by reference and defined them to be a part of the parties’ agreement.
Section 5 of the NFLPA Regulations contained a broadly worded arbitration clause that covered a wide variety of disputes (“[t]his arbitration procedure shall be the exclusive method for resolving any and all disputes that may arise from ….”) and set forth the applicable arbitration procedure (“[t]he [arbitration] hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association”).
The AAA Rules provide that “[t]he parties shall be deemed to have made these rules a part of their arbitration agreement whenever, in a collective bargaining agreement or submission, they have provided for arbitration by the American Arbitration Association.” The AAA Rules go on to specify, under the subdivision titled “Jurisdiction,” that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The AAA Rules also provide that “[t]he arbitrator shall interpret and apply these rules insofar as they relate to the arbitrator’s powers and duties.”
The Court held, based upon the incorporation by reference doctrine, that the foregoing language in the SRA and the NFLPA Regulations evidenced “a clear intent by Revis and Schwartz to arbitrate the threshold issue of arbitrability.” Slip op. at *5 (citations omitted).
The Court explained that where the rules of the arbitral forum are incorporated into the parties’ agreement, the courts are to enforce the agreements. Thus, “[w]here the rules that were incorporated into the parties’ agreement provided that threshold arbitrability issues were to be resolved by the arbitrator,” the courts will enforce “that aspect of the parties’ agreement and compel the parties to submit ‘gateway’ arbitrability issues to the arbitrator.” Id. (citations omitted).
The Court found that the parties intended the arbitrator to decide the gateway issue of arbitrability:
Here, it is undisputed that Revis and Schwartz entered into the SRA, thereby invoking the broad umbrella of the NFLPA regulations and the fiduciary duties created therein. Section 5 of the NFLPA Regulations, which contains a broadly worded arbitration clause, provides that “[t]he [arbitration] hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association.” The AAA Rules, in turn, grant the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The SRA thus makes “clear reference” to Section 5 of the NFLPA Regulations, which, in turn, makes “clear reference” to the AAA Rules in such a way that the intent of the parties to incorporate those specific documents “may be ascertained beyond doubt.”
Id. (citing 11 Richard A. Lord, Williston on Contracts § 30:25 (4th ed. 2020)).
The Court noted that its decision was consistent with the holdings in state court and in federal court where the courts “similarly reviewed arbitration agreements that incorporated, by reference, virtually identical provisions of the American Arbitration Association.” Id. at *5-*6 (citing and discussing cases).
The Court concluded that defendants “demonstrate[ed] that Revis and Schwartz incorporated the AAA Rules into the documents that collectively constitute[d] their arbitration agreement,” and therefore “established ‘by “clear and unmistakable” evidence’, that Revis entered into an agreement with Schwartz pursuant to which they agreed to arbitrate ‘gateway’ questions of arbitrability.” Id. at *6. Under the circumstances, therefore, the Court held that the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Schwartz, and to stay those portions of the action pending completion of arbitration.” Id. at *7.
B. The Nonsignatories
Although only “a party to an arbitration agreement is bound by or may enforce the agreement” (1 Domke on Commercial Arbitration § 13:1 (2020), defendants nevertheless maintained that the nonsignatory defendants in the complaint, i.e., the named defendants that did not sign the SRA, were entitled to compel Revis, a party to that agreement, to binding arbitration in the same manner as Schwartz. “Given the allegations in the complaint,” the majority agreed. Id. at *7.
In New York, “[a] nonsignatory to an arbitration clause may, in certain situations, compel a signatory to the clause to arbitrate the signatory’s claims against the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement to arbitrate.” Id. (citations omitted). “A non-party to an arbitration agreement may compel a party to arbitration if the relevant state contract law allows the non-party to enforce the arbitration agreement.” Id. (citations omitted).
Under principles of agency, “agents are afforded the benefit of arbitration agreements that were entered into by their principals to the extent that the alleged misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation.” Hirschfeld Prods. v. Mirvish, 88 N.Y.2d 1054, 1056 (1996) (citations omitted). Such a rule, the Court of Appeals has said “is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” Id. at 1056.
“Here,” said the Court, “the allegations in the complaint which were made against S & F and Feinsod relate solely to work that ‘was done on behalf of … Schwartz.’” Slip Op. at *8. “Given the allegations in the complaint,” concluded the Court, “the nonsignatory defendants identified therein—Feinsod and S & F—were entitled to enforce the arbitration provisions contained in the SRA and the NFLPA Regulations.” Id. (citations omitted). Accordingly, held the majority, “the Supreme Court properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Feinsod or S & F, and to stay those portions of the action pending completion of arbitration.” Id.
Finally, the Court held that, under the direct benefits theory of estoppel, Shavae was bound by the arbitration clause in the SRA, although it was not a signatory to the SRA.
Here, the complaint does not distinguish between the two plaintiffs in terms of the relief sought. In other words, Shavae seeks the same relief as Revis in each of the eight causes of action asserted in the complaint. Even assuming that Shavae is not an alter-ego of Revis, Shavae independently seeks to recover, under the fourth cause of action, damages for Schwartz’s alleged breach of the SRA. In the sixth cause of action, the complaint alleges that Shavae is entitled to recover amounts that should have gone to it pursuant to the terms of the SRA and Shavae independently seeks to rescind the SRA and recover “rescissory damages.”
Given the allegations in the complaint that Shavae was entitled to certain benefits under the SRA and that it was entitled to recover various types of damages due to Schwartz’s alleged breach of that agreement, Shavae should be compelled to arbitrate in accordance with the arbitration clause contained in the SRA by application of the direct benefits theory of estoppel.
Id. (citations omitted).
Accordingly, held the Court, the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Shavae, and to stay those portions of the action pending completion of arbitration.” Id.
In dissent, Justice Dillon, joined by Justice Cohen, would have reversed the motion court and denied the motion to compel.
The dissent argued that the majority misread the relevant documents in that there was no straight line from the SRA to the NFLPA Regulations to the AAA Rules necessary to “conclude that the separate Marketing and Endorsement contract (hereinafter the M & E) must initially go to an arbitrator in the event of a dispute between the parties over the M & E.” Id. at *9. According to Justice Dillon, the SRA did not incorporate the NFLPA Regulations for the resolution of disputes that arose outside of the SRA. Id. As such, “the terms of the AAA Rules [were] not reached.”
The dissent found that the limiting language of “Paragraph 8 of the SRA—that the NFLPA Regulations appl[ied] to the arbitration of disputes involving ‘this Agreement’—[was] consistent with Paragraph 3(A) of the SRA, where the existence of the M & E [was] disclosed but expressly described as a ‘separate agreement,’ and Paragraph 3(B) of the SRA, which provide[d] that the SRA was signed by Revis without being conditioned upon the signing of any other agreement.” Id. (orig’l emphasis). “In other words,” said Jusitice Dillon, “the reference to the M & E in Paragraph 3 was not to include it within the SRA, but to distinguish the M & E from the SRA, with each of the two contracts separate from the other, and the existence of one not conditioned upon the other.” Id.
Justice Dillon noted that, while he agreed with the majority about the right of the parties to contractually agree to delegate issues of arbitrability through a “gateway” to an arbitrator, the parties did not delegate the issue with regard to the M & E. “The gateway applies to an arbitrability dispute involving the SRA itself,” said Justice Dillon, “as the gateway’s existence relie[d] upon the broad arbitrability provisions of the NFLPA Regulations and the AAA Rules.” Id. at *10. To the dissent, the M & E did not reach the NFLPA Regulations or the AAA Rules through the SRA. Id. “In other words,” concluded the dissent, “reliance upon the NFLPA Regulations and the AAA Rules, to support the conclusion that arbitrability is solely for the arbitrator to decide, puts the cart (the NFLPA Regulations and AAA Rules) before the horse (the M & E).” Id.
The dissent observed that “the M & E, standing alone, [was] independently subject to the broad language of the NFLPA, requiring that the unwritten M & E document [was] subject to arbitrability.” Id. However, because the point was not raised before the motion court, it was not properly before the Court on appeal, and could not be considered because the issue was not “one of ‘pure’ law untethered to any question of fact.” Id. (citations omitted). The reason, explained the dissent, was because it was unclear whether Schwartz was acting as Revis’ attorney or Contract Advisor in relation to the M & E. Id. Thus, even if the Court were to consider the issue on the merits, “the existence of such a question of fact, by which arbitrability is ambiguous, preclude[d] our compelling an arbitration at this juncture and instead vest[ed] the Supreme Court with the obligation of determining whether the parties’ dispute [was] arbitrable.” Id. at *10-*11 (citations omitted) (noting that the language of the NFLPA Regulations, which extended its provisions to “any other activity or conduct which directly bears upon the Contract Advisor’s integrity, competence or ability to properly represent individual NFL players and the NFLPA in individual contract negotiations,” did “not clearly and unmistakenly apply to disputes with individuals who may be acting as private attorneys for a player on matters unrelated to an NFL contract, such as an endorsement deal, a matrimonial litigation, a real estate transaction, or a speeding ticket.”).
As to the nonsignatories, Justice Dillon said that “the absence of an unambiguous arbitration agreement between Revis and Schwartz mean[t] that Shavae, LLC, Jonathan Feinsod, and the law firm of Schwartz & Feinsod, LLC, who were also named as defendants, [were] not subject to arbitration over the M & E.” Slip op. at *11.
Accordingly, the dissent would have reversed the order appealed from and denied defendants’ motion to compel arbitration and to stay the action pending completion of the arbitration.