I. The Role of Delegation Clauses
A. Distinguishing the Merits from Gateway Questions
Arbitration jurisprudence under the FAA distinguishes between two types of disputes over arbitration agreements. Merits issues comprise the substantive dispute between the two parties, which they (at least at one point) agreed to arbitrate. In addition to merits issues, parties will often disagree over what are called gateway disputes. This second category of disputes is the subject of this article. A gateway dispute is a dispute over whether arbitration is appropriate in the first place. Gateway disputes include whether the scope of the arbitration agreement covers the dispute at hand and whether the arbitration agreement between the parties is valid. For example, a party mounting a validity challenge tends to rely on the traditional contract defenses preserved by section 2 of the FAA, such as unconscionability, fraud, and duress. Their contention is that an agreement between the parties has been formed, but should not be enforced. The validity challenge raises the question of whether the dispute between the parties is arbitrable at all. In addition to scope and validity challenges, courts have recognized other potential gateway disputes to arbitration, including whether class-action arbitration is available; what law applies to the question of arbitrability; whether a contract between the parties has been formed; and the applicability of procedural rules such as a time-bar, waiver, delay, or similar issues.
Understandably, resolution of gateway questions will affect the resolution of the merits of an arbitration dispute. If an arbitration agreement is invalid, or if a dispute falls outside the scope of an arbitration agreement, the dispute cannot be arbitrated. It will be decided in court. And if a party is averse to litigation, this may lead to a settlement where an arbitration might have taken place. Gateway questions have become hotly contested sites in modern arbitration jurisprudence, and the Supreme Court has taken an active interest in guiding lower courts.
B. First Options
In First Options of Chicago, Inc. v. Kaplan, Manual and Carol Kaplan challenged the applicability of an arbitration agreement to their dispute with First Options of Chicago, Inc. The Kaplans had signed four “workout” agreements on behalf of themselves and their investment company, MKI. But only one of the four workout documents contained an arbitration clause and only MKI—not the Kaplans—had signed it. At an arbitration, the Kaplans argued that their dispute with First Options was not arbitrable because they had not signed the relevant document.
The Kaplans and First Options also disagreed over who should decide whether their dispute was arbitrable. The Court noted that since arbitration is “simply a matter of contract between the parties,” courts should defer to the arbitrator if the parties agreed to arbitrate “the arbitrability question.” But if “the parties did not agree to submit the arbitrability question itself to arbitration, then the court should decide that question . . . independently.”
But how should courts decide whether the parties had agreed to submit arbitrability questions to an arbitrator? The Court drew on “state-law principles that govern the formation of contracts,” but with a twist: courts should look to whether the parties “objectively revealed an intent” to arbitrate arbitrability, but this intent needed to be shown with “‘clea[r] and unmistakabl[e]’ evidence.” Unlike questions about the scope of an arbitration agreement, questions about arbitrating arbitrability are “rather arcane,” and a party “often might not focus upon” them. Further, giving an arbitrator that level of jurisdictional power “might too often force unwilling parties to arbitrate a matter they reasonably thought a judge, not an arbitrator, would decide.” Applying this analysis to the Kaplans, the Court held that they had not clearly and unmistakably agreed to arbitrate arbitrability, upholding the decision of the Third Circuit.
First Options was a bit of a departure from prior precedent. In Moses H. Cone, the Supreme Court had articulated a broad presumption in favor of arbitration when courts rule on questions of arbitrability. First Options reversed this presumption for one specific question: who decides questions of arbitrability. The clear and unmistakable standard has been widely applied by lower courts and endorsed several times at the Supreme Court. The benefits of the standard are obvious: it provides a test that courts can apply on a “rather arcane” issue and provides guidance to both those who draft arbitration agreements and those who seek to challenge them. But there are challenges too. The clear and unmistakable standard—which was originally applied only to determine whether the parties had agreed to arbitrate disputes over the scope of an arbitration agreement—now encompasses not only disputes over scope but also several other legal issues, including validity and the availability of class arbitration. So long as an arbitration agreement contains a delegation clause that clearly and unmistakably commits these issues to the jurisdiction of the arbitrator, challenges to gateway issues must be argued before an arbitrator, not a court. The only gateway issue that is not regularly assessed under the standard is the question of whether an arbitration agreement was formed. If an arbitration agreement was never formed, then an arbitrator lacks any authority to decide disputes between the parties.
C. Proving Clear and Unmistakable Evidence of Intent
First Options purports to create a presumption against arbitrating questions of arbitrability, but the clear and unmistakable standard actually made it easier for parties to agree to arbitrate arbitrability. After First Options, arbitration agreements began to include delegation clauses, which “expressly allow the arbitrator to decide any issue relating to the agreement to arbitrate the merits,” and which by their terms purport to supply the requisite clear and unmistakable evidence of intent to arbitrate arbitrability.
There are two main types of delegation clauses: textual delegation clauses and incorporated delegation clauses. Textual delegation clauses are explicit provisions in the arbitration agreement that manifest the agreement of both parties to arbitrate questions of arbitrability. As an example, the Eighth Circuit has held the following to be a valid textual delegation clause: “Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s).” As long as their terms are unambiguous, courts typically find textual delegation clauses to be clear and unmistakable evidence of intent to arbitrate questions of arbitrability. This result is fairly intuitive. If terms within the four corners of the arbitration agreement clearly provide for delegation, then courts ought to enforce the terms as written and allow the arbitrator to decide questions of arbitrability.
Incorporated delegation clauses are more complex but theoretically ought to obtain the same result as textual delegation clauses. In the years following First Options, major arbitration providers like the AAA began to modify their arbitration rules to include provisions granting arbitrators the power to rule on their own jurisdiction. Today, most major rules of arbitration include similar rules, enshrining the power of the arbitrator. Most courts interpret these provisions—which are incorporated by reference into arbitration agreements through a clause adopting an arbitral provider’s rules—as clear and unmistakable evidence of the parties’ intent to arbitrate questions of arbitrability. This incorporation can be as simple as “In the event the parties are unable to arrive at a resolution, such controversy shall be determined by arbitration . . . in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “AAA”) or any organization that is the successor thereto.” While the mechanics of incorporation by reference are governed by state contract law, the result is roughly uniform: if the arbitration agreement clearly refers to a specific set of arbitral rules, the arbitral rules become part of the terms of the arbitration agreement and bind the parties.
D. Insights from the Last Decade: Rent-A-Center and Schein
In the last decade, the Court has cemented the importance of delegation clauses as a feature of modern arbitration law through two main points of law. First, the Court held that litigants must defeat a putative delegation clause before challenging the validity of the container arbitration agreement. Second, the Court indicated that one of the only ways to defeat a putative delegation clause was to show that as a matter of contract interpretation there was no clear and unmistakable evidence of the parties’ intent.
In Rent-A-Center, West, Inc. v. Jackson, the Court held that if an arbitration agreement contains a valid delegation clause, any gateway disputes—such as scope or validity—must be argued before an arbitrator, not a court. The Court drew on principles of severability found in Prima Paint Corp. v. Flood & Conklin Manufacturing Co. to hold that delegation clauses were standalone agreements to arbitrate specific issues of enforceability and validity. In Prima Paint, the Court had required a party to specifically challenge an arbitration agreement contained within a larger contract. Extending that logic, Rent-A-Center requires a party challenging a delegation clause inside an arbitration agreement to argue that the delegation clause itself is invalid. The Court also noted that the clear and unmistakable standard was fundamentally one of contract interpretation, albeit a “heightened” standard compared to ordinary contract questions. Therefore, while the plaintiff in Rent-A-Center argued that he did not subjectively intend to delegate questions of arbitrability to the arbitrator, his objective manifestations in the contract controlled. The result leaves those who challenge arbitration agreements with few options: they must first convince a court either that a delegation clause is not clear and unmistakable evidence of intent, or that it is invalid.
In Henry Schein, Inc. v. Archer & White Sales, Inc., the Court revisited delegation clauses and re-emphasized the limited role for judicial review. In Henry Schein, the Court struck down the “wholly groundless” exception to arbitrability, where courts would decline to enforce a clear and unmistakable delegation clause on the grounds that the dispute clearly fell outside the scope of the arbitration agreement. If the parties had in fact delegated questions of arbitrability to an arbitrator (which the Court assumed without deciding), then the FAA required an arbitrator to decide whether a particular dispute fell within the scope of the arbitration agreement. The wholly groundless exception contravened this rule because it allowed a court to rule on the arbitrability of the dispute even if the parties had contracted for an arbitrator to make that decision. The Court tasked the Fifth Circuit on remand with determining whether the delegation clause was clear and unmistakable in the first place.
Rent-A-Center and Schein combine to sketch a Court that is skeptical of attempts to restrict the application of delegation clauses. Given the infeasibility of proving that a delegation clause is invalid, i.e., unconscionable, the main avenue of challenge preserved for litigants is to argue that a delegation clause is not clear and unmistakable evidence of intent. And since the (heightened) standard is one of objective contract interpretation, textual delegation clauses will almost always clear the bar. But some courts paint a murkier picture when assessing incorporated delegation clauses, especially as applied against unsophisticated parties.
II. Sophistication and Incorporated Delegation Clauses
I argue that sophistication ought to be a factor courts consider in assessing whether an incorporated delegation clause is clear and unmistakable evidence of a party’s intent to arbitrate questions of arbitrability. The history surrounding the FAA’s origins suggests arbitration was conceived of as a tool to regulate the conduct of discrete groups that share normative commitments and whose members repeatedly deal among themselves. An unsophisticated party to an arbitration agreement is less likely to be a member of the same self-regulating community as the drafting party. There is a marked difference between (1) two firms that frequently deal with each other choosing to arbitrate disputes according to the norms and practices of their shared industry; and (2) a firm requiring unsophisticated employees and consumers to sign arbitration agreements as a condition of employment or access to the firm’s services. For one, the firms that regularly deal with each other play a role in shaping the industry’s norms and have an interest in upholding shared norms to ensure smooth dealing. It is unlikely that firms that wish to arbitrate employment and consumer disputes are similarly motivated, if only because unsophisticated employees and consumers are much less likely to be repeat players in the same industry as the firm. On the one hand, sophistication can thus serve as a useful proxy for courts to assess whether an arbitration is between insiders, or between an insider and an outsider. Unsophisticated parties are much more likely to be outsiders to a given industrial community’s shared norms and practices and may not even know the importance of an arbitration agreement or a delegation clause. On the other hand, a sophisticated party is more likely attuned to the shared norms of a particular community and has the ability to meaningfully assess the commitments to arbitration that they are making.
In this Part, I assess the circuit split that has developed on the question of whether the effectiveness of an incorporated delegation clause depends on the sophistication of the parties. I first examine the majority rule: that it does not. Then I turn to the circuits where lower courts have disagreed with the majority rule and explicitly leave room for sophistication in the analysis of whether a delegation clause meets the clear and unmistakable standard.
A. Majority Rule: No Sophistication Analysis
Among most circuits in the country, a majority rule on incorporation by reference has coalesced: if arbitral rules contain a delegation clause, incorporation by reference of these arbitral rules is clear and unmistakable evidence of intent to allow an arbitrator to decide questions of arbitrability. Unlike the Ninth and Fourth Circuits, where some courts explicitly assess the sophistication of the parties in determining whether the delegation was clear and unmistakable, the majority of circuits adopt a formalist approach. They apply incorporation doctrine and assess the manifestations of the parties as contained within the four corners of the arbitration agreement. Sophistication is not explicitly referenced, nor does it factor into the decisions of these courts.
In at least one circuit, this rule emerged in cases where arguably unsophisticated parties challenged arbitration agreements imposed on them by a defendant with superior knowledge and sophistication. In Fallo, a group of students sued a for-profit vocational school, which moved to compel arbitration. The Eighth Circuit affirmed the district court’s order compelling arbitration and, in so doing, found the incorporation of AAA rules into the students’ enrollment agreement a clear and unmistakable delegation. However, there the students did not argue that the incorporation of AAA rules was not clear and unmistakable as to them because they were unsophisticated. They instead argued that the enrollment agreement required application of Missouri law, which required courts to “determine the question of arbitrability as a matter of law.” The court rejected this argument in light of Preston v. Ferrer, which held that a choice of law provision did not override the parties’ “adoption of the AAA rules” as to arbitrability issues. Therefore, Fallo did not directly consider the issue of sophistication. Nevertheless, some lower courts point to Fallo as evidence that an unsophisticated plaintiff can still manifest clear and unmistakable evidence of intent to delegate. In several other circuits, the rule hasemerged as a result of individual plaintiffs challenging arbitration agreements. In these circuits, sophistication challenges likely fail.
However, half of the leading cases arose in disputes between two sophisticated organizations, where no sophistication-based objection could be raised. For instance, in Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., the parties were a prime contractor, who operated the U.S. Department of Energy’s Strategic Energy Reserve, and a subcontractor tasked with installing equipment to service the Reserve. Similarly, the parties in Contec Corp. v. Remote Solution Co. were two business entities engaged in international commerce, a field where arms-length bargaining is likely to occur.
Even in these circuits—where there is arguably room to distinguish the leading cases on their facts—courts tend to reject sophistication challenges. Typically, these courts deny that anything other than the text of the agreement should be considered in determining whether the intent of the parties is clear and unmistakable; the intent of the parties must be objectively determined from their written manifestations only. Courts also point to the lack of in-circuit caselaw on the topic as a justification for rejecting a sophistication analysis, or note that the “clear weight of authority” rejects sophistication as an analytical tool in this inquiry. Finally, courts reason that because the leading cases did not cabin their holdings in terms of sophistication, they did not believe it a necessary element of the clear and unmistakable inquiry.
B. Minority Rule: Sophistication Matters
Courts in the Ninth, Fourth, and Third Circuits have carved out an exception to the majority rule: incorporation of arbitral rules does not satisfy the clear and unmistakable standard when one party to the agreement is unsophisticated. The Ninth Circuit opened the door to this exception in a pair of cases decided in 2013 and 2015. In both Oracle America, Inc. v. Myriad Group, A.G., and Brennan v. Opus Bank, the court found that incorporation of arbitral rules amounted to a clear and unmistakable manifestation of intent to arbitrate questions of arbitrability. But, in both cases, the Ninth Circuit expressly limited its holding to sophisticated parties. The Fourth Circuit followed the Ninth Circuit in 2017, when it adopted the same limited holding. And the Third Circuit has yet to issue any binding precedent on the broader question of incorporation by reference of arbitral rules as effective delegation clauses.
Some lower courts in these three circuits deviate from the majority rule on incorporated delegation clauses when one of the parties to the agreement is unsophisticated. These courts tend to share a similar rationale for rejecting the majority rule. First, the Supreme Court has made clear that the clear and unmistakable standard is a heightened interpretive standard, appropriate for a “rather arcane” question that the parties may not have thought about. And not only is the question arcane, but the reference to the incorporated delegation clause also tends to be hidden inside a boilerplate arbitration agreement, within a boilerplate contract. Thus, the enforceability of incorporated delegation clauses against unsophisticated parties implicates “the fundamental tension in contract law between enforcing only those agreements that parties intended to make . . . and enforcing the letter of the documents that they sign . . . .”
Faced with this tension, these courts decline to find a consumer’s or employee’s clear and unmistakable intent to arbitrate arbitrability in an incorporated delegation clause. The Allstate court read the clear and unmistakable standard as:
an application of [unconscionability doctrine] to this specific context [of deciding who decides questions of arbitrability]. Under that view, because an agreement to arbitrate arbitrability is an “arcane” concept that a party would not likely expect to find in a larger agreement, see First Options . . . , an agreement to do so should not be enforced if the parties’ intent is not clear.
And when a party signs onto boilerplate, “the most that person can be said to have intended is his or her willingness to be bound to the terms that lie within, whatever they may be, provided that those terms are reasonable in light of the object of the contract.” This analysis left the court with two conclusions: (1) “it may be a difficult proposition to say that the text of an arbitration clause itself, when found among contract boilerplate, may constitute clear and unmistakable evidence of an unsophisticated party’s intentions,” and (2) “incorporating forty pages of arbitration rules into an arbitration clause is tantamount to inserting boilerplate inside of boilerplate, and to conclude that a single provision contained in those rules amounts to clear and unmistakable evidence of an unsophisticated party’s intent would be to take ‘a good joke too far.’”
How courts assess sophistication varies. Some appear to consider the type of commercial relationship, such as that between a consumer and a company or between a franchisee and a franchisor, to determine sophistication. One court that relied on this analysis seemed to create a rebuttable presumption against sophistication when confronted with a consumer challenging her bank’s overdraft fee practice. Others determine sophistication on the facts, assessing whether the parties had business experience, legal education, or professional certification. Some cases find even pro-se plaintiffs to be sophisticated based on their business experience.
The pro-sophistication case law faces several challenges and critiques from courts that decline to consider sophistication in considering incorporation by reference. First, some district courts reject a sophistication analysis on policy grounds. In Hernandez v. United Healthcare Services, the court refused to distinguish between sophisticated and unsophisticated parties to an arbitration agreement because “the factors that might make someone ‘sophisticated’ are poorly suited to a standard definition upon which parties can rely to avoid uncertainty or surprise in the meaning of the instrument they signed.” Other courts reject sophistication on simpler grounds: Brennan and Oracle both contain dicta that suggest that sophistication of the parties may not matter to the issue of incorporation by reference. Finally, other critiques of a sophistication-centric analysis of incorporation by reference rest on California contract interpretation principles.
As this subpart has demonstrated, a sophistication analysis reflects unease among judges that an overly formalist approach to the clear and unmistakable standard unduly jeopardizes the rights of consumers and employees when they challenge often-adhesive arbitration agreements. In the next Part, I argue that these concerns are well-founded and provide some theoretical justifications to support the use of sophistication as a factor in assessing whether an incorporated delegation clause is effective.
III. Challenging Incorporated Delegation Clauses as Applied to Unsophisticated Parties
A. Many Consumer Arbitration Agreements Are Contracts of Adhesion
A contract of adhesion is typically defined to include the following: standardized terms used over a large quantity of identical transactions, drafted by a party with greater bargaining power, presented to the other party in dense fine print, and providing that other party with little or no opportunity to bargain over terms. And the non-drafting party may be unable to shop around for better terms, because either “the author of the standard contract has a monopoly . . . or because all competitors use the same clauses.” Due to the near total absence of choice, the non-drafting party’s “contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party.”
Many arbitration agreements in the consumer and employment spaces are contracts of adhesion under this definition. An illustrative example: when a consumer signs up for cell phone service, they will sign an arbitration agreement as a condition of activating their account. This same agreement will likely be signed by every consumer seeking cell phone service from the same firm. The consumer cannot bargain over the terms of the agreement, which are drafted by the firm’s counsel to minimize its risk. The agreement is also likely to be denser than even the rest of the container contract. And, in the wireless sector, there is no realistic opportunity to shop around if a consumer wants to avoid arbitration: 87.5% of wireless carriers covering 99.9% of the market require consumers to arbitrate claims. Most of these carriers—85.7%—covering 84.5% of the market, require delegation of some or all claims. And the majority of these delegation clauses are incorporated delegation clauses.
B. Unconscionability Doctrine and the Clear and Unmistakable Standard
The law of unconscionability, stemming from equity and codified in the Uniform Commercial Code (U.C.C.), has long been a tool used by courts and consumer-minded attorneys to challenge adhesive agreements in the consumer and employment setting. A party seeking to demonstrate that an agreement is unconscionable must show both that the agreement is (1) procedurally unconscionable; and (2) substantively unconscionable. Procedural unconscionability can also be considered “an absence of meaningful choice.” Factors in determining whether an agreement is procedurally unconscionable include “the employment of sharp bargaining practices,” “the use of fine print and convoluted language,” “a lack of understanding, and an inequality of bargaining power.” In other words, a party must show they have signed a contract of adhesion.
Courts assessing procedural unconscionability are empowered to look to the sophistication of the parties in their analysis. In the leading case of Williams v. Walker-Thomas Furniture Co., the D.C. Circuit expressly weighed the consumer plaintiff’s sophistication in assessing the procedural unconscionability of the rent-to-own form contract that she had entered into with the defendant. The court noted that a plaintiff’s “obvious education or lack of it” would impact whether the plaintiff had a “reasonable opportunity to understand the terms of the contract.” Terms “hidden in a maze of fine print and minimized by deceptive sales practices” were unlikely to show either “his consent, or even an objective manifestation of his consent,” and greater judicial scrutiny of the contract was warranted. Judicial scrutiny of the procedure of contracting, paired with scrutiny of the substantive terms, protects consumers from excessively one-sided terms or terms they may not have expected the agreement to contain.
Unconscionability is used as a common challenge to consumer arbitration agreements. After all, the Supreme Court has made clear that arbitration is but a matter of contract. But an effective delegation clause forces plaintiffs to argue—even their unconscionability—challenges before the arbitrator as they challenge the validity of the arbitration agreement.
The presence of a delegation clause need not put an end to the matter, though. A delegation clause is only effective if it is clear and unmistakable evidence of the parties’ intent to delegate. This is a higher bar than ordinary questions of contract interpretation, stemming from the Court’s concern that questions surrounding who decides arbitrability are “rather arcane” and not ordinarily considered by any party, let alone an unsophisticated one. These concerns, like those of courts policing unconscionable agreements, stem from a desire to balance the competing interests of holding parties only to agreements they actually entered into and enforcing the terms of the contracts they signed. And this is why some courts read the clear and unmistakable standard in First Options to allow for applying principles of unconscionability.
Despite some disagreement among scholars as to whether contracts of adhesion are contracts at all, it is widely acknowledged that a non-drafting party to a contract of adhesion has agreed to be bound by the agreement as an objective matter. But, as Professor Randy Barnett has recognized, even if a party has manifested an intention to be legally bound, not all terms in the form contract are necessarily enforceable: “there are limits to what the obligation can be.” There are certain terms to which a non-drafting party might say “while I did agree to be bound by terms I did not read, I did not agree to that.” In other words, terms in a form contract that fall outside of the reasonable expectations of the non-drafting party should not be enforced unless they are brought to that party’s attention.
Barnett’s framework clarifies the objective nature of the clear and unmistakable inquiry and highlights the problematic nature of incorporated delegation clauses as measures of intent. First, a party to a consumer arbitration agreement manifests an agreement to be bound to terms that do not exceed some bound of reasonableness. Second, the Court has repeatedly made clear that the question of who decides arbitrability is “rather arcane,” and it cannot be assumed that both parties were thinking about that question. In other words, delegation provisions are presumptively outside the bounds of reasonable expectations absent notice. Third, incorporation by reference of arbitral rules into an arbitration agreement fails to give notice to a consumer that they will be bound to arbitrate questions of arbitrability. Rather, it amounts to “inserting boilerplate inside of boilerplate”; in addition to the fine print of the container contract, the agreement now purports to bind the consumer to over forty pages of additional terms and conditions. These incorporated delegation clauses fail to provide any notice to the non-drafting party of their contents. If anything, they are the polar opposite of notice: a consumer would need to (1) understand that incorporating arbitral rules gives those rules legal heft; (2) locate the appropriate set of rules; (3) locate the relevant rule containing the delegation clause; and (4) understand that, by agreeing to an incorporation of arbitral rules, she is agreeing to delegate all arbitrability disputes. Therefore, Barnett’s objective analysis of form contracts strongly suggests that an unsophisticated consumer does not manifest any intent to delegate questions of arbitrability, let alone a clear and unmistakable manifestation of intent, when she agrees to arbitrate disputes under AAA rules.
Reading unconscionability law into the clear and unmistakable standard would not greatly disrupt the state of arbitration law outside of the specific question of unsophisticated parties and incorporated delegation clauses. For one, it is highly unlikely that bargained-for arbitration agreements between sophisticated parties would be disrupted. Firms bargaining at arms-length could tailor delegation clauses to fit their needs, and their access to counsel and experience with arbitration would obviate any claims of unfairness. And, even in consumer situations, a textual delegation clause would likely be considered fair. If a drafter provides sufficient notice to a consumer that they are sacrificing their right to bring a validity challenge in court, it is likely that a court would not find the delegation clause unconscionable.
Some may argue that it is inappropriate for courts to dabble in extrinsic matters to determine the intent of the parties to an arbitration agreement. But the Supreme Court has lent its support to this practice. In Mastrobuono v. Shearson Lehman Hutton, Inc., the Supreme Court upheld an award of punitive damages. The defendant brokerage firm argued that the arbitrator could not do that because the standard form agreement incorporated New York law, which barred arbitrators from awarding punitive damages. The Court held the incorporation ambiguous at best and construed the ambiguity against the drafter. The Court continued:
As a practical matter, it seems unlikely that petitioners were actually aware of New York’s bifurcated approach to punitive damages, or that they had any idea that by signing a standard-form agreement to arbitrate disputes they might be giving up an important substantive right. In the face of such doubt, we are unwilling to impute this intent to petitioners.
And if the Court was willing to look to the background of the plaintiffs to determine their intent in a situation where there was no heightened interpretive standard in place, it stands to reason that such an inquiry is permissible under the Court’s clear and unmistakable standard.
Critics may also argue that the text of the FAA does not allow courts to assess consumer arbitration agreements with a closer look than other types of agreements. But the clear and unmistakable standard itself cannot be found within the bounds of the FAA either. It is judge-made law, reflective of a concern that the question of who decides arbitrability is deserving of special scrutiny. This article simply proposes to add clarity to this standard and develop an understanding of what, exactly, should be considered clear and unmistakable. A fuller understanding of the clear and unmistakable standard is especially beneficial to drafters of arbitration agreements in order to reduce uncertainty, risk, and the potential for legal expense.
C. Are Incorporated Delegation Clauses Effective Incorporations?
Courts generally consider incorporated delegation clauses to be effective incorporations of arbitral rules. But incorporated delegation clauses may be insufficient as an incorporation of a separate writing, especially when one party is unsophisticated. There are three main requirements for a separate writing to be incorporated into a contract. First, the contract must make clear reference to the extrinsic document. Second, the identity of the document must “be ascertained beyond doubt.” Third, the “parties to the agreement [must have] knowledge of and assent[] to the incorporated terms.” Incorporated delegation clauses implicate the third requirement.
Courts assessing incorporated arbitration clauses have strongly suggested incorporations are not as effective against consumers as they are against merchants. In Standard Bent Glass Corp. v. Glassrobots Oy, the Third Circuit held an arbitration clause was successfully incorporated into a contract between two merchants, even if the buyer did not receive the arbitration clause. The court relied on the buyer’s experience as a merchant in an industry where arbitration is common and explicitly noted that, had the buyer been “a non-merchant individual . . . , or if the reference to arbitration had been buried, the analysis might very well be different,” because merchants should “exercise a level of diligence that might not be appropriate to expect of a non-merchant.” The court’s heavy implication was that it would enforce incorporated terms less stringently against non-merchants.
The Glassrobots court’s implication obtains even greater salience in light of the clear and unmistakable standard. It is highly unlikely that an unsophisticated consumer or employee has knowledge of or assents to delegation of arbitrability when the delegation clause is incorporated through arbitral rules. Assuming a consumer or employee takes the time to read an agreement containing an incorporated delegation clause prior to signing it, a phrase like “this arbitration agreement will be governed by AAA Consumer Arbitration Rules” does not impart knowledge of those terms or their effect: the reader would not understand that mere mention of the rules serves to rebut the presumption against arbitrating questions of arbitrability.
Courts could police delegation clauses as ineffective incorporations. If an arbitration agreement referred to arbitral rules but failed to notify the non-drafting party that this was a delegation clause, that party would lack knowledge of the delegation clause’s terms. This ineffective incorporation certainly would not be clear and unmistakable evidence of intent.
D. Proposal: A Rebuttable Presumption of Unsophistication in Certain Contexts
This article has argued that incorporated delegation clauses are not clear and unmistakable evidence of an unsophisticated party’s intent. But when is a party unsophisticated? Courts have loosely grappled with this question across several circuits, but no coherent test has emerged. And, absent a limiting principle, this approach would admittedly lead to uncertainty for drafters and plaintiffs alike.
This article proposes a rebuttable presumption of unsophistication for certain classes of contracts, such as contracts of employment and consumer contracts. Courts could presume that the employee or consumer is an unsophisticated party, unless the party seeking to compel arbitration can rebut the presumption. Such an analysis remains faithful to the First Options guidance that questions of arbitrability are “rather arcane” and restores some heft to the “clear and unmistakable evidence” standard and its presumption against arbitrability. This analysis would undeniably remain somewhat fact-specific but provides some certainty where none currently exists. Those who draft and rely on these classes of contracts would be on notice that if they wish to delegate issues of arbitrability, an incorporated delegation clause alone is not enough.
Conclusion
Virtually every American consumer is likely a party to at least one arbitration agreement, and the same is true for many employees. Yet the use of arbitration in either context raises questions of consent: a consumer or employee presented a boilerplate arbitration agreement on a take-it-or-leave-it basis can be said to have consented in only the most rigid of senses. The absence of meaningful consent helps explain why so many consumers and employees seek to invalidate these agreements. And, like in the case of Jennifer Howard, incorporated delegation clauses compel arbitration when the validity or scope of the agreement itself is at issue. The end result is troubling. A plaintiff like Howard is completely shut out of the civil litigation system. She could not challenge the validity of her arbitration agreement in court and cannot seek post-award review unless she meets one of the four narrow exceptions under the FAA.
Arbitration, the Court has taught time and time again, is a matter of contract. But that instruction does not excuse deference to arbitrators in all situations. Courts must still interpret agreements to determine who should decide questions of arbitrability and have been instructed that the presumption should weigh in favor of courts. To blindly defer to an incorporated delegation clause undermines the First Options presumption and threatens the broader legitimacy of our civil justice system. This article has sought to build on this core premise and has illustrated why incorporated delegation clauses should not overcome the First Options presumption when invoked against an unsophisticated party. This result respects the contractual nature of arbitration while revitalizing First Options.
