Understanding Prima Paint’s Severability Rule

Prima Paint and Its Progeny

The severability rule originated in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). The precise question the Supreme Court faced was whether a court or an arbitrator should resolve Prima Paint’s fraudulent inducement claim—i.e., that the contract at issue was fraudulently induced and thus unenforceable. As an initial matter, the Court held that the Federal Arbitration Act (FAA) governed the contract because the contract evinced a transaction involving interstate commerce. Id. at 399; see also 9 U.S.C. § 1 (“commerce” means “commerce among the several States”). The court then focused on the FAA’s text to resolve the central issue. Specifically, section 4 of the act states that, “upon being satisfied that the making of the agreement for arbitration . . . is not in issue,” the court must direct the parties to arbitration. 9 U.S.C. § 4 (emphasis added); see also Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (quoting 9 U.S.C. § 2) (section 2 of the FAA provides that a “written provision” to “settle by arbitration a controversy” is enforceable “without mention of the validity of the contract in which it is contained”). Relying on section 4’s language, the Court held that, when a party claims that the other party fraudulently induced it to consent to an arbitration provision—“an issue which goes to the ‘making’ of the agreement to arbitrate”—the court may decide the dispute. Prima Paint, 388 U.S. at 404. In contrast, section 4 doesn’t permit a court to “consider claims of fraud in the inducement of the contract generally.” Id.

Two subsequent decisions, Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), and Rent-A-Center, helped refine the contours of the severability rule. In Buckeye, the Court made clear that the rule applies outside the fraudulent inducement context. It held that, because “an arbitration provision is severable” under federal substantive law, an arbitrator should resolve the issue of the contract’s enforceability “unless the challenge is to the arbitration clause itself.” 546 U.S. at 446. Courts consider whether the “crux” of a complaint is a challenge to the enforceability of the contract as a whole or to the arbitration clause itself to decide if it or an arbitrator should hear a dispute. Id. at 444. The Court readily acknowledged that, as a practical matter, the severability rule “permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void.” Id. at 448. But this operation of the rule is consistent with the long-standing principle that “any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). The Court also held that the severability rule applies whether a party brings a challenge to the enforceability of an arbitration provision in federal or state court. Buckeye, 546 U.S. at 446; see also Southland Corp. v. Keating, 465 U.S. 1, 15–16 (1984) (the FAA creates substantive law applicable in state as well as federal courts).

In Rent-A-Center, the Court considered whether it should enforce a “delegation provision” embedded in an arbitration agreement. Under delegation provisions, parties depart from the default rule and expressly authorize an arbitrator, not the court, to decide substantive issues of arbitrability, such as the enforceability of the arbitration agreement. 561 U.S. at 71. Invoking the severability rule, the plaintiff, Jackson, argued that the court should decide whether the arbitration agreement was enforceable because he specifically attacked that agreement. Id. The Supreme Court disagreed. It noted that the delegation provision in this context is the separate written provision to arbitrate that Rent-A-Center asked the courts to enforce, and the rest of the contract is the agreement to arbitrate Jackson’s underlying claims. Applying the severability rule, the Court held that it must enforce the delegation provision and, under the terms of that provision, leave any challenge to the enforceability of the arbitration agreement as a whole for the arbitrator. Id. at 73 (citing 9 U.S.C. § 2). In other words, the delegation provision is simply an additional, antecedent agreement to arbitrate that a party “asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.” Id.

This line of cases establishes seven principles for the severability rule’s application:

1. The FAA creates a body of federal substantive law governing contracts for transactions involving interstate commerce.
2. An arbitration provision is severable from the remainder of the contract as a matter of federal substantive law.
3. An arbitrator must decide a challenge to the enforceability of a contract as a whole.
4. A court must decide a challenge explicitly to the enforceability of an arbitration clause.
5. A court should consider the crux of a complaint to decide whether a party attacks the enforceability of the contract as a whole or the arbitration provision itself.
6. The federal substantive law of arbitrability applies in both state and federal court.
7. An antecedent agreement to arbitrate included in an arbitration agreement is severable from the remainder of the arbitration agreement.

We now discuss how Rogers and Peeler applied some of these principles.

Rogers v. SWEPI LP

The contract in Rogers was a phased oil and gas lease involving Shell. The parties agreed that the FAA applied to their dispute because the lease affected commerce. A portion of the lease became effective on execution, allowing Shell to encumber the property and verify title (the first phase). But the remaining obligations under the lease didn’t become effective until Shell paid Rogers a signing bonus (the second phase). Accepting Rogers’s argument, the district court held that the second phase of the contract—which contained the arbitration provision—never became effective because Shell never paid the signing bonus. Thus, the court denied Shell’s motion to compel arbitration. 2018 WL 6444014 at *2.

A divided Sixth Circuit panel reversed. The court didn’t buy Rogers’s contention that he had attacked the arbitration clause’s formation. Rogers, in fact, admitted that he executed the lease and his “attack on the arbitration provision assumes the contract was formed; that it conferred obligations on the parties; and that Shell failed to perform one of its obligations, meaning the arbitration clause was never triggered.” Id. at *3. The court explained that, while courts resolve challenges to the enforceability of “the specific arbitration clause” as a matter of federal substantive law, Rogers didn’t attack “the enforceability of the ‘specific arbitration clause.’” Id. at *4 (quoting Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 296 (2010)). Instead, he argued that “much of the contract, which happens to include the arbitration clause, is unenforceable.” Id. Because Rogers didn’t specifically attack the arbitration clause, the Sixth Circuit held that an arbitrator must consider his enforceability challenge. In reaching a contrary conclusion, the dissenting judge seemingly ignored the dispositive point that Rogers had broadly attacked the validity of the entire contract, not the arbitration agreement specifically. See id. at *8 (Moore, J., dissenting).

Peeler v. Rocky Mountain Log Homes Canada, Inc.

Peeler, a Florida resident, entered into a contract with White River, a Montana company, to build a home in Montana; the contract contained a broad arbitration provision. Peeler filed suit in a Montana trial court for breach of contract and related claims after White River allegedly failed to deliver the home as provided under the contract. But the trial court granted White River’s motion to compel arbitration and dismissed the action. Peeler, 431 P.3d at 917–18.

The Montana Supreme Court unanimously affirmed the trial court’s decision. The court didn’t distinguish between the FAA and the Montana Uniform Arbitration Act because the parties had not contended that the choice of arbitration law made any difference. Id. at 918. Applying the severability rule, the court noted that Peeler didn’t contest that he and White River formed a valid contract or that he freely consented to the contract’s arbitration provision. Quite the contrary, he brought claims, such as breach of contract, that posit the existence of an enforceable agreement. Id. at 920. Noting that Peeler “did not raise any challenge” in the trial court “regarding the validity or enforceability of the arbitration agreement apart from the balance of the larger contract,” the court held that an arbitrator should hear Peeler’s enforceability challenges. Id. It also emphasized that the severability rule prevents a party who “validly agreed to arbitrate from subsequently avoiding arbitration by pleading claims asserting that the large contract, or other aspects thereof, are void.” Id. at 919.

Conclusion

Prima Paint’s severability rule addresses the question of whether a court or an arbitrator decides a challenge to the enforceability of an arbitration provision: An arbitrator hears attacks on the enforceability of an entire contract, while attacks expressly aimed at the arbitration provision are for a court to decide. Indeed, as a matter of federal substantive law, courts decide substantive (or gateway) questions of arbitrability, such as whether the parties have an enforceable arbitration clause, unless the parties clearly and unmistakably provide otherwise. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).

The author has observed that many courts (or attorneys) appear confused by the severability rule in the many cases in which he moved to compel arbitration over the years. E.g., Henderson v. U.S. Patent Comm’n, Ltd., 15 C 3897, 2015 WL 6791396, at *5 (N.D. Ill. Nov. 2, 2015) (citing Buckeye, 546 U.S. at 449) (“Henderson alleges that Defendants’ scheme contained fraudulent elements, but those elements do not relate to the arbitration provisions themselves; they instead affect the validity of the agreements as a whole and thus, again, are matters for the arbitrator”) (internal citations omitted). However, the well-reasoned opinions in Rogers and Peeler show that courts do indeed understand how to apply this rule. It is hoped that this article will serve as a helpful tool for any judge, arbitrator, or counsel seeking a better grasp of the severability rule.

Charles E. Harris II is a partner at Mayer Brown LLP in Chicago, Illinois.

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